Dispatch from the WMFHA 2010 Annual Economic Forecast

I just returned from the Washington Apartment Outlook panel, "Perspectives and Projections for 2010" hosted by the Washington Multifamily Housing Association, and can share some interesting items discussed there. Speakers were Rob McKenna, Washington State Attorney General; Matthew Gardner, of Gardner Economics in Seattle, and Mike Scott, of Dupree Scott Apartment Advisors in Seattle.

How we got here

Rob McKenna gave a detailed yet compelling background on the factors contributing to the housing market crash, going back to 2005. Among them are the .com stock bubble, which sent trillions of dollars out of the stock market and into the real estate market. Combined with sustained low interest rates and well intentioned federal policies increase homeownership, both broadly and among lower and middle income consumers, it became a perfect storm creating high demand to drive up exponentially. We all know the results over the past 2 years as this crashed, people lost houses, consumer spending dried up, and businesses began failing or cutting back dramatically.

But the question on everyone's mind wasn't the history review, it was "when will the recovery be here?"

The Recovery- it's on its way

All three panel speakers concurred on this, each from their own perspective. Mckenna noted that the recovery will require consumer "de-leveraging", that is, spending less on credit and paying existing credit down, and Gardner in fact showed data that consumer use of revolving credit has been decreasing since June of 2008. He also pointed out that Federal stimulus spending will continue to increase through 2010, which will help, although at some point inflation becomes a concern, as well as what will drive spending and demand after the stimulus runs out. Presumably it will be from consumers as business spending and jobs pick back up, and Gardner expects the Seattle job market to begin recovery in the 4^th quarter of this year (not significantly until 2010 however), with technology, life sciences and philanthropy being the strongest areas. Mike Scott made what I thought was an excellent point, that this region needs to be aggressive about landing- and keeping- new jobs and businesses. We seem to take our relative strength as a region for granted- but could greatly increase our fortunes in this recovery with more focused attention on driving economic growth. Gardner also showed an interesting graph of job creation and loss over the full decade- which showed that in total, the US is at the same level as we were in 2000- we essentially haven't created any news jobs in 10 years. So, Seattle needs to get serious about competing for the pool of employers and jobs out there.

McKenna wrapped up this topic with a discussion around policy work & market policing that is underway to support the recovery and resolve the structural issues that contributed to it (very much in his role as an Attorney General of course), which include pushing for faster turnaround on loan modifications, monitoring the reverse mortgages market to eliminate harmful practices, and aggressively fighting foreclosure rescue scams.

What about the Seattle Rental Market

This was the second most pressing question on everyone's mind. Current vacancy rates in the region sits at 6% in-city, 9% gross (which includes projects recently finished and still in lease-up, which will compete with properties already on the market in the near term). This is up from 4-4.5% 2 years ago. Add to this 2,000 new units (these figures are all 5+unit developments, so don't include smaller properties and single family) still scheduled to come on the market through 2009, 3,700 in 2010 and 2,000 in 2012 and 2013 (although these are planned, whether they get financed and built is a huge open question). So, that's 9,700 net new units onto the local market over the next 4 years. So, this will continue to be a softening impact on rents.

Before we panic, however, demographic forecasts seem pretty bright. Historically, the US has maintained a fairly stable 65/35 own/rent ratio (65% of households rent, which 65% own). Since about 2003, this has grown to 69/31, however, with the adjustment in the housing market, this is beginning to return to normal, so there are 4% of households returning to the rental market over the next few years. Also, the baby boom and echo boom demographics remain the fastest growing segments of the population, both of which are primarily rental households. Mike Scott showed data that in Seattle, the 20-34 year old demographic in Seattle will grow by 14,000 per year through 2014, including inflow population to the region. So, that's 70,000 net new potential renters who will need those 9,700+ new units. So, even with new developments and properties to fill the gap, I got the strong sense that we will see higher demand for rental units as these two market forces continue to adjust (and if they do so as forecast).

Key takeaways

The vibe among the panel speakers and the audience was optimistic, although not celebratory. I think that's because it seems to be getting better, but with no certain timeframe or milestones within the next couple years. This doesn't seem to be a recovery with a silver bullet- there are many fronts that are being tackled, and as a result, it will be slower that we are used to. Consensus was that 2010 will continue to see relief over 2009, but how much and how soon seemed to be open issues. Our guidance at RD House remains to be a vigilant knowledge of the market and comparable properties, aggressively solicit renewals, focus on effective marketing of units, and exploit every opportunity to help owners decrease operating costs.

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