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The Secret Potion for Growth in the Apartment Market – By Patrick Simons

Posted on 28. Feb, 2012 by in all, Magazine Articles

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The economic shocks of 2007-2009 are still fresh in the collective mind of the real estate industry.  So, despite the dramatic rebound in apartment fundamentals and the new surge of apartment development activity (or perhaps because of it), many apartment industry insiders and outsiders are questioning how long it will last.
With literally thousands of permitted units just waiting for financing in many markets there is rightfully one key question to be asked right now:
Is the newfound strength in the apartment market sustainable?
Although certain economic events could change our opinion, we believe the answer for many markets will be “yes” over the next five years.  Many markets will navigate the veritable wave of new apartments likely to be delivered.

Where will the demand come from?  The simple answer is that it doesn’t need to come from anywhere.  The demand is already here.
The past four years have seen a massive doubling up of twenty-somethings who, because of being either unemployed or underemployed, are living with their parents or rooming with friends or relatives who are employed.  In fact, the U.S. Census recently reported that approximately 5.9 million young adults aged 25 to 34 are doubled up nationwide.
Of course, prior to the start of the recession, there were certainly twenty-somethings who for various reasons lived with their parents.  So, our market-specific analysis removes that number as a baseline and focuses on what we term the “excess” doubled-up young adults – in other words, those who, if the economy were stronger, would be out on their own… most likely renting an apartment.
Here are just a few of our estimates of the number of “excess” doubled-up young adults in some of the primary cities (or in one case a county) in some of the major markets we track:

Los Angeles – 24,047
Orange County – 15,956
San Francisco – 6,090
Seattle – 3,500
Denver – 2,493
Chicago – 14,517
Miami – 1,358
New York – 52,034

(Note that these estimates are based on Census data which is adjusted for local unemployment data and local housing cost data.)

Generally, our current forecast is for employment in most major markets to remain fairly flat in 2012 with steadily increasing growth building in 2013 and beyond.  (Of course, that could change with any number of possible future economic events.)
This rise in the number of “excess” doubled-up young adults is creating a snowballing amount of pent up demand – a huge number of individuals who are ready and willing, but not able, to rent.  And, next spring, there will be yet another wave of them graduating from college.
So, when the economy slowly picks up momentum, and these young adults (the perfect renter-by-choice demographic, mind you) find jobs in which to “toil,” they will “un-double.”  And that un-doubling will happen very quickly, meeting or even exceeding the new supply being delivered.
To summarize, we’ve seen doubling and more doubling the past few years, but when young adults start to toil, they’ll un-double right into apartments.  I know Halloween is already one major holiday ago, but my butchering of Shakespeare’s witch’s incantation from Macbeth might help you remember:  “Double, double, toil, un-double.”

Patrick S. Simons of Strategic Residential Advisors has been personally involved in $1 billion of residential development or redevelopment and the oversight of nearly $700 million of residential assets.  For more information, please call (949) 933-9405 or email psimons@strategicresidential.com.