“The Accidental Economist” With Jack Kern

‘The Accidental Economist’ with Jack Kern: Ordinary People

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Jul 072011

I was in a long line at the grocery store the other day and started speaking with the person in front of me. We started remarking about how high food costs had become and what a dent it was making in summer plans for lots of people. After exchanging some pleasantries, it came out that I do investment research for a living and I was asked if I had any good stock tips. I’m pretty used to this and so I recommended the peaches, which were on sale this week.

For the past four years I’ve been in practice, the focus has been on how multifamily would be affected by the recession and whether or not owners would be able to survive the recovery. Along the way we were treated to an avalanche of reports on foreclosures, failing single-family home markets, and what was supposed to be a rush of new renters, previously from foreclosed homes, filling up apartment communities. It did occur to me that a lot of that happened, but not in the way it now seems to be popularized. I think it’s a good idea to reset how the stage looks and really focus on the new world order in rental.

When I was at a National Multihousing Council meeting in 2007 and markets were beginning to show softness, Clyde Holland of Holland Partners Group famously stood up and decried that we’re in for a tough couple of years, but it will be rental heaven in 2011. To my knowledge, other than our own forecasts of about four years of distress, Clyde was the only major owner to publicly acknowledge what everyone else was feeling. Even Steve Liesman, noted economist from CNBC and a very astute guy, had his own take on this, which focused more on Federal Reserve policy than industry practices. Steve, you were right, but for some different reasons.

The people who rent apartments are not objects of study and derision for homebuilders, but instead just ordinary people who need a place to live. The decisions may be based on school districts, proximity to work or transit lines, but inevitably as a point in time observation it’s important to remember that renters, whether by choice or economic circumstances, are now filling up communities. The media attention has treated this class as refugees from foreclosure, or recently employed middle- to high-wage earners, or in some more humorous instances escapees from their old rooms at Mom and Dad’s ancestral home. Oddly enough, a lot of renters come from homes being rented, so it isn’t surprising they seek similar shelter.

I’m not a fan of “shadow” markets because the data indicates that there have been rental households going back to much earlier periods than the 1800s. For me, the interesting part of this is the perception of who the new renter is, and that’s what I’m going to be writing about for most of this summer. With the completion of some of our surveys and other market studies, we’ve probably never been in a better position to share insights with you, so starting next week, we’re going to take all of this apart and show you what’s really going on.

Until then, I hope your lines at the grocery store move more quickly than mine do and occasionally they put more items on sale. That would help everyone.

Jack Kern is the managing director of Washington, D.C.-based consultancy Kern Investment Research, LLC. Formerly the head of research at Archstone-Smith, Jack has been in the news a lot lately giving opinions about what Archstone is going to do next. Lately he’s been thinking about hiring a guy to start his car.

‘The Accidental Economist’ with Jack Kern: Provando et Riprovando

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Apr 062011

The Federal Reserve has been without a discernible rudder ever since the royalty that was Alan Greenspan left. Without so much as a nod to the current chairman, Greenspan has been out touting his success as the previous Fed chair, giving speeches and publishing books about the great run up in the economy prior to his inexorable exit.

Now perhaps, some history is in order. The Federal Reserve recently released the minutes of its March 15 meeting, where they had a protracted discussion on housing policy and quantitative easing, both of great interest to property owners and capital markets. It seems the Fed will aver to the position of maintaining the final phase of QE2, the last part of the current round of expansionary monetary policy started near the end of last year. With weak housing markets and difficulty in obtaining financing for commercial properties part of their discussion, the Fed seems to acknowledge what we have been saying all along. Fed monetary policy failed to control the run up in home prices and massive numbers of apartment units converting to condominiums for a very good reason. They couldn’t. The Fed, as global markets go, lost control of the money supply.

Under Chairman Greenspan, the laissez-faire policies of the previously much-more-obscure Fed provided an opening for international investors to come into the U.S. market and purchase special-purpose vehicles of all kinds, debt or mortgage securitized, and ultimately provide the excess of capital that ran the real estate market squarely into the crash of 2007. Now the Fed, under Ben Bernanke, is left without a lot of room to change this. What we’re seeing is the result of both the dissolution of how CMBS used to work and a rebirth of sorts in the new securitization of debt and mortgage paper.

So what does this March 15 meeting portend for commercial real estate markets? As a voracious user of capital, commercial property markets ultimately depend on the health of capital markets. Since only the largest REITs, publicly and non-publicly traded, have ready access to capital, cap rates will continue their modest compression, new construction will remain slow to begin in most places, and current assets in place should see increasing values. What we probably won’t see is QE3. It does seem that the Fed is more apt to model Greenspan’s hands-off policy for now, and there is little political will to do much more given the budget deficit. It may just be that this strategy works best of all. And as for Galileo Galilei’s quote at the outset of this post, it means “try and try again.”

Jack Kern is the managing director of Kern Investment Research, LLC, a Washington D.C.-based research consultancy specializing in commercial real estate forecasting and analysis. Having been criticized by some Fed governors for his views on their lack of perspective, he must be doing something right. Jack can be reached at jkern@kernirc.com or 301-601-1900.

‘The Accidental Economist’ with Jack Kern: 60 Is the New 60

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Apr 042011

I started working with senior citizens, elderly renters or older residents–as you may wish to call them–many years ago. Having done a vast amount of study of this group of homeowners, renters, and ultimately nursing and congregate care residents has provided a wealth of information on who they are and what they want. Recently, this aging cohort of prospective renters and condo buyers has generated a huge amount of interest on the part of management companies and owners. It seems an aging population is becoming an emerging market segment.

Let’s take a run at the numbers:

As of July 1, 2009, there were 39.6 million people 65 years of age and older. Just between 2008 and 2009, this age group jumped up by 770,699. Considering they now make up about 13 percent of the population, that’s an extraordinary change in conditions.

Fast forward to 2050, and the estimates provide for 88.5 million people age 65 and older, which will represent about 20 percent of the total U.S. population.

Currently the projected number of echo-elders worldwide above the age of 65 is 545 million but is expected to leap to 1.55 billion by 2050, effectively increasing the population from around 7.5 percent to roughly 17 percent globally.

Clearly, this is a generation that deserves attention from marketers and owner/developers. While there are quite a few accomplished and financially successful prospects in this age range, the average median income in 2009 for households with householders 65 and older was $31,354, compared to the median income for all households at $49,777. Over time, that will catch up as passive wealth is transferred into income-generating activities.

So the leading question is, what do they want?

There is no simple answer, but I can share some observations, proven out over many years of working with this population. I like these people, and find them fascinating subjects for study and discussion. Once you get a hold of them and can get their cooperation (focus groups and intercepts take a lot of patience) and sort through the dozens of stories about life, grandchildren, dry cleaning, early-bird specials and other challenges of living well into your 80s and 90s, you start to see a wonderful consumer. Here is some of what they’re thinking:

They want to age in place. 60 may be the new 60, but this population doesn’t think they’re “old” in any sense of that word until health, family members or their ability to care for themselves changes their outlook. And even then, we’re talking about someone closer to 75, not 65.
Age-restricted housing means a quiet quality of life with no school-bus stops, sports teams or other noise contributors. They’re not anti-social in any way, and in fact are quite active and social, it’s just that their focus has changed to wanting a more societally conscious and friendly lifestyle with less grass cutting and weeding.
They like to rent. One of the old jokes about the elderly is that a long-term commitment is a magazine subscription. The reality is that this population is still pretty mobile, rents often for extended periods before buying or committing to a long-term housing alternative in a new area, and is happy to pay rent. From a management perspective, they’re good renters in all respects and well liked in most communities.

When we get into their housing preferences, it becomes more complicated, and the time horizons shorten. Large luxury kitchens as the center of their entertainment are important, but they don’t have to own them. Easy access to vehicle parking and local services rate high on the list, but so to do inter-urban locations and dense suburbs. Building out a community specifically for echo-elders isn’t worthwhile, but incorporating features that attract them, especially in more generous units, will provide a lift for most properties.

This booming cluster of future renters is becoming a more important force in property management, and yet we still see the focus on Gen Y. It seems it would be a great idea to cater to both.

Jack Kern is the Managing Director of Kern Investment Research, LLC and a veteran of thousands of hours working with echo-elders, a phrase the firm coined when the previous term “old folks” turned out to be unworkable. In both focus panels and intercepts Jack has developed an expertise in understanding the aging consumer and renter cohort. Jack can be reached at JKern@KernIRC.com or 301.601.1900.

‘The Accidental Economist’ with Jack Kern: Major Bank Discovers Young Homebuyers–News at 11

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Mar 292011

I had a great laugh today. On one of the newswires there was a headline article about how a major national bank discovered that millennials might represent the biggest home-buying cluster to come along in years. Imagine that, a bank that makes home loans talking about how it will be great to sell these mostly unemployed or underemployed young people a home. With large numbers of foreclosures still on the market in lots of places, much tougher underwriting standards in place and even fewer real estate agents hustling buyers, it strikes me as a public relations goof of epic proportions.

According to the article, the bank said there were more than 51 million potential first-time homebuyers born between 1979 and 1991 and that about 6 million of these are reaching the prime home-buying age faster than baby boomers did. (I’d love to see the math behind that one). So fundamentally what we have here is a news article (news being a relative term; just watch Fox and you’ll see what I mean by that) about a non-event by a bank that is in the very business of selling loans. So if logic permits, it means that Gen Y’ers who have taken a pounding in the job market and don’t conceivably have any savings to be able pay the down payment, bank fees and closing costs are more likely to buy. With what? Magic beans?

This kind of activity on the part of the bank strikes me as irresponsible. The bank, to promote the agenda of why now is a great time to get stuck with a house, even rented out movie theaters and played a video to 25,000+ agents (popcorn optional), extolling the virtues of this limited argument. I’m sure the audience, mostly aging real estate agents (they call them blue hairs in Cadillacs, I understand) ate it up. You see, an average of 40 percent of them barely made even $25,000 in the past year selling real estate. I’m guessing the balance made less than $40,000 by a wide margin, with less than 3 percent traditionally being the big money makers. The balance probably split the difference. One understated benefit of this past recession is at least fewer people were trying to get me to sell my house, putting their cards on the windshield of my car and accosting me at parties. It’s been a good couple of years on that score.

There is currently an inventory of foreclosed and abandoned homes running up to about 10 years of supply, and while it’s concentrated in the same four major areas one might expect, there isn’t a single metropolitan area that has escaped at least some issue with this. And so now is the best time to buy a cheap home if you’re a speculator, investor with deep pockets and an undying belief that prices are going back up, or someone under the influence of a real estate agent related to you.

We really could use an honest housing policy in this country, and this kind of bank sponsored activity reminds me of the good old days, when at least you knew what the Resolution Trust Company was going to do. And yet, here we are again.

Jack Kern is usually in a good mood. This week, his daughter gave birth to his first granddaughter, and so he’s heading out of town to see her and make sure she isn’t already thinking of buying a home. A bottle warmer is probably a much better present. You can reach Jack at Kern Investment Research, LLC, based outside of Washington, D.C., at jkern@kernirc.com or by calling 301.601.1900. If you’re a real estate agent, leave a message. He’ll call you back.

‘The Accidental Economist’ with Jack Kern: Take Two Price Increases and Call Me in the Morning

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Mar 232011

We’re in the beginning of rent season, where office managers start to sing again and residents chirp their discontent for paying more to get less. The pricing and revenue management systems have been refined to utilize lower scores in resident screening and identify rent-increase potential based on less traffic across the board.

Recently I was in the middle of a discussion between several major owners, their pricing staff and some of the vendors for these systems. It seems that while rents are increasing and new modules are being developed, some of the sales teams for these automated price emperors are touting their newly advanced capabilities and talking about why it’s worth paying a higher per-unit price than last year. Oh, how this gives me a headache.

I’m fond of telling people that research is the advocate for that elusive commodity, the customer, and I have to tell you, these systems are creating havoc right now in a lot of ways. Not only are some renters looking to rent someplace where the price doesn’t change every day, but many of them are looking at non-traditional alternatives. It seems you can rent a condominium or a single-family home for almost the same rate as a professionally managed apartment, and the rent is a number you can understand from a person that doesn’t hide behind a black box. Now, fundamentally I’m not against these PRM systems, and in certain circumstances I think they can help out a great deal. Try changing from managing 50 units to 600 units and you’ll see what I mean.

What I am hearing that I find distressing is that many portfolio managers and asset-level managers are becoming discontented with these systems because, on a benchmark level, a large number of properties across mostly A and B platforms are under-performing. It is mostly because the site staff has been told to obey the black box and not attempt to capture a prospective renter unless they use what someone told me were “stupid pet tricks,” meaning you offer something. They get to the door, you offer a small concession; they get to the parking lot, you offer a few months free. It’s become like a bazaar, with everyone saying they’re burning off concessions, but in fact they’re just adjusting pricing and hiding what are retention problems.

Stability in a rental property is an important factor in assuring a good quality of life for the resident. I like to see a lot more service in the tired phrase customer service, and a lot less worshiping the black box. What many do not seem to realize is that, as an industry, these practices are pushing residents into alternative housing choices, ones that rarely raise rents at the same rate as professionally managed buildings. Pricing power is still in the hands of the resident, and this high season of rental discontent is going to see an early fall. With average incomes not keeping pace with spikes in rent in most places, the pool of available customers is getting smaller all the time. The smart money is on the operator that listens and leaves the black box as a doorstop.

Jack Kern is the managing director of Kern Investment Research, LLC and a recognized expert in consumer behavior, rental markets and property research. He is also the founding chairman of the Association of Real Estate Research Professionals, a 550-member organization dedicated to the art and science of research. Jack can be reached at 301-601-1900 or jkern@kernirc.com.

‘The Accidental Economist’ with Jack Kern: Consumer Confidence Tracks Renter Outlook

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Feb 282011

Don Marquis, American poet and writer – 1878 to 1937, once said, “An optimist is a guy that has never had much experience.”

There are a number of consumer confidence surveys out there and with each passing week it seems yet another publisher is trying to index one thing or another. I have long since suspected that these surveys aren’t all that reliable as economic indicators, but they have been useful in one respect. While the surveys generally measure a consumer’s propensity to purchase, or make life changes based on how they’re feeling about their own situation, they also provide insight into the psyche of renters. Renters will more often than not (81%) accept some rent increase at renewal or pay for a higher cost apartment if they wish to upgrade when they’re feeling comfortable and positive about their lives, so keeping watch on the University of Michigan’s Survey of Consumers is important to anyone in the apartment business.

According to Richard Curtin, the survey’s chief economist and someone I’ve spoken with at NABE meetings, (economist egghead group who debate components of GDP and
complain about the CPI – I love this group), “Consumers are increasingly aware that the economy is improving and, more importantly, expect job prospects to become more favorable in 2011.”

What the survey also says is that consumer confidence is at its highest level in three years. High income households (above $75,000) accounted for a rise in the sentiment index of almost 10%. That index did decline slightly in lower-income groups by under 2 percent. A more interesting observation about the release is that this formerly white collar
recession is now seeing the best opportunity for growth in employment and income in higher wage positions. Good news for apartment leasing and part of a broad based trend leading away from the recessionary years of 2007 to 2010, and focusing now on the anticipated recovery. It also portends a generous outlook that a double dip recession is unlikely. Other leading economic indicators seem to agree with that as well.

So what to do with this bit of good news?

The indicators, along with recent news in apartment markets about resurgent rent increases and gains in occupancy should encourage owners to look at their pricing and revenue management systems, which almost always miss critical inflection points like these. While we’re in the low end of the rental cycle, with leasing season a few months away, now is a good time to examine economic occupancy, instead of physical occupancy, and see if your asset manager has a handle of what’s going on. You may just find they’re still leasing like it’s 2009.

Jack Kern is the managing director of Kern Investment Research LLC, a consultancy specializing in real estate research, investment banking and advisory services. He is also the principal founder and chief research officer for the Association of Real Estate Research Professionals, a group currently located on LinkedIn. You are invited to explore this group and share insights on real property research with the membership.

‘The Accidental Economist’ with Jack Kern: Why Frozen New Home Sales are Good for Builders and the Apartment Industry.

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Feb 252011

Albert Einstein is quoted as saying, “In the middle of every difficulty lies opportunity.” We are at a point in the economic cycle where it’s logical that new home sales would still be struggling. For a lot of reasons, I’m actually happy about this. To me, markets have to proceed in an orderly fashion and today’s news that new home sales are essentially at the same point they’ve been since the middle of last year is a good sign. Let’s go to the videotape:

The headline is that new home sales declined by about 12.5 percent to a 280,000 annual rate in January. Existing home sales were up about 2.5 percent during the same period, mostly likely due to incentives and low pricing on foreclosures. Now there is most certainly a seasonal component to this, but before the Congress and the lobbying from the National Association of Home Builders goes nuts over this, I hope some reasonableness factor becomes evident, and here’s why.

There are still a substantial number of homes in foreclosure and more on the way. The good news is that in 2007 the number of homes on the market in foreclosure probably hit around 72 percent of the total inventory, while now the number seems to be closer to 25 percent. Part of the reason is that more homes are being offered for sale by people who waited for their markets to improve, and the rest is due to judicial intervention (activist judges, political wrangling and tighter controls on courthouse processes) that caused the volume to slow down. Quite simply–and I don’t think anyone disagrees with this–we have to clear out the inventory of unsold, foreclosed homes before the rest of the markets can return to a more normal state.

Apartment owners are achieving significant gains in rents in many markets for the moment, and while that is going to be a somewhat short-lived phenomena, it will permit most properties to return to post-2008 rent levels by mid-year. Some may even see rent increases getting them closer to their previous 2009 rates. What isn’t happening for the most part is a huge flight to apartments from single-family foreclosures, even though some members on Capitol Hill seem to feel that’s the case. A recent call from one of the dumber members of the Federal Reserve calling for another round of housing stimulus will hopefully fail to materialize.

There are, in the parlance of land traders, an astounding number of low-priced builder lots in the home-building shadow market in most of the states where you’d expect to see huge gains in construction of new single residences. It would literally take just a few months for these previously approved parcels to start construction without the usual delays and entitlement issues and cause a flood of new units, which cannot compete in price with foreclosures and the decline in home values in most markets. The net effect, according to some staff at the NAHB, is to build much smaller, much less expensive starter homes, which would only add to the inventory glut. Thankfully that isn’t happening very much.

So why should builders be happy about this? Because the process is proceeding along in an orderly fashion, and once the balance of the single-family home market shows its inevitable correction, then builders will have free rein to start offering new, more innovative products to homebuyers at prices that make sense. By then capital markets will have returned to a more normal level and financing standards will be much more reasonable for new home purchasers. And apartment developers, now seeing the benefit of an emerging national economy and increases in rents, will once again probably lose the customary 18 percent of residents to new and existing home purchases.

I’m all for a balanced national housing policy, and with any luck at all, this time around rental alternatives, in both multi- and single-family will gain as much respect and attention with the administration as home ownership. It is nice that, at least for now, multifamily is the shining star in investment and management and doing everything right. Homebuilders will get their turn, and will hopefully remain patient, at least until apartment rents return to pre-recessionary levels.
Jack Kern is the managing director of Kern Investment Reseach, LLC, a consultancy specializing in multifamily research. He is also an avid forecaster and is in the process of completing his next round of employment and rental market forecasts for 2011 and 2012. If you’d like to be invited to the next comprehensive markets call, please drop him a note at jkern@kernirc.com.

‘The Accidental Economist’ with Jack Kern: The Tunnel at the End of the Light?

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Feb 082011

There’s an old Chinese proverb that I like: “If we don’t change direction, we’re going to end up where we’re headed.” It reminds me of the current state of commercial real estate finance and how it will inevitably affect the apartment industry. So far, including the last part of 2010, we’re heading into a low cycle, one characterized by gradually improving business conditions, growth in general employment and some settling in the investment markets. I’ve been saying for years that this recession, despite the oddly shaped dip you see on graphs in the paper, has really been a leaking trough. It helps to explain why it has taken so long for the demand to back-fill that annoying drip that caused concessions to grow.

The improvement in rental conditions has been nothing short of amazing, and certainly within the context of this time in the cycle, it has been a continual bright spot. Multifamily is related to and not alone in the newly cast bright light of renewed demand. Both office and retail have shown some improvement as well. The increase in office leasing, especially in major markets, signifies a welcome willingness to take up more space and hire professional staff. Between those gaining ground with promotions and the new hires, the apartment industry will get its share. On the retail side of commercial real estate, retail sales are up as much as 4.5 percent in some places, and while spending is anticipated to wane on a seasonally adjusted basis, consumers are venturing out more and demonstrating a comfort level with their situation and personal finances.

If business spending picks up, then the prospective torrent of new hires, especially among recent graduates still seeking a position, will provide very bright headlines.

With all of this good news, and the velocity with which things have turned around, I am concerned about all points heading to the same destination. Let me explain. If the economy gains steam, and the rate of rent gain maintains its present course, then the two components of the CPI–however reviled by economists–will needlessly drive inflation and cause the “tunnel” effect. One where prices, rental rates and inflation, and interest rates try to stay at the same rate. Inevitably inflation jumps the track and makes it out of the tunnel before the rest.

How realistic is this? Rents are growing and are reflected in both privately released data series (think Pierce-Eislen) and the Bureau of Labor statistics CPI series for core inflation. It represents, depending on how picky you get, about a third of the CPI gain or loss, recognized for the owner’s equivalent rent and rent of a primary residence. I don’t want to confound this by the absolutely inane way they do the calculation (okay, but maybe a little).

The most recent releases by economists I really respect and follow all seem to agree that inflation, at a pet-rock pace of less than 1 percent right now, might increase at a rapid trajectory, sinking much of what was gained in the past six months. If we get rental inflation at the same time that we get inflation targeting by the Federal Reserve, it will have successfully killed off the demand wave we are now enjoying. And that risk is completely out of the press right now. With nominal interest rates forecast to begin climbing by midyear, that tunnel is looking all the more crowded with every passing day. For once, I’m going to look away from the light.

Jack Kern is the managing director of Kern Investment Research, LLC and the current chair of the Association of Real Estate Research Professionals. Jack recently returned from a fact finding trip to Hawaii and discovered it is much less expensive to buy pineapples and coconuts locally at the Safeway rather than smuggle them in a bowling ball case. He can be reached at jkern@kernirc.com or by calling 301.601.1900.

‘The Accidental Economist’ with Jack Kern: NMHC Has Great Parties

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Jan 232011

I just got back from the National Multi Housing Council’s annual apartment festival, and to tell you the truth, I had a great time. For one thing, I never saw so many ruby slippers on acquisition and development guys, wandering around waiting to click their heels together to end up in Kansas. Apparently off-market and non-core deals are becoming all the rage as yield meets cornfields and the wide-open plains. Being a St. Louis boy (go Cardinal nation), I suppose that it’s only fitting that the Midwest somehow ended up being part of the acquisition binge again.

Did I mention all the parties and free food and booze?

“Still crazy after all these years,” as Paul Simon likes to say, is a great description of the vast tranche of money chasing deals all over the country. For those of you who were unable to attend the meeting, there were some terrific sessions on market trends, best practices and even a scolding by a very well known CEO who warned his colleagues not to “screw things up this time.” I liked that session a lot.

Most of the time being in research is a buzz kill because you listen intently to the panelists extolling the virtues of their positions but—as someone who is a big believer in statistical evidence—it kind of makes you wonder. I’d love to be able to spend these meetings wandering around with an idiot grin, like a cheshire cat, waiting for the next deal to fall into my lap, but as the smoke clears, what is left isn’t often what we started with. Let me give you an example.

When I was growing up in tiny Creve Coeur Missouri, we had lots of tornadoes and they frequently touched down, destroying neighborhoods and villages on a pretty regular basis. You could hear the freight-train roar of the wind and feel the concrete basement walls vibrate. Since the walls were about 10 inches thick—partly to keep the houses from blowing away and partly to enrich the concrete company—you gained a newfound respect for what tornadoes could do. When it was all over, inevitably on the news they’d interview a local contractor and ask them how it was going, and they’d always reply, “Well, business has never been better.”

In mid-2007, as I forecasted to those of you who read me, the recessionary wind started blowing across the multifamily plains, and when the economic storm finally struck, there was a lot of damage. Fast forward to 2011 and the brokers and lenders will tell you business has never been better.

It really makes you wonder.

Jack Kern is a partner and chief economist at Palatine Capital Partners in New York and managing director at Kern Investment Research, LLC. He also serves as research editor for Multihousing News and Commercial Property Executive. As a singer and composer, his most recent recording of “Let It Rent,” was released by his garage band Research Tool, and is expecting to bounce around on the bottom of the charts. Jack is a frequent speaker at commercial real estate events and can be reached at JKern@KernIRC.com.

‘Capital Insights’ with Jack Kern: Don’t Count Out Rents as House Prices Languish

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Oct 022009

"I get knocked down, but I get up again, you're never gonna keep me down!"
Tubthumping Lyrics
(c) Artist (Band):Chumbawamba

Most forecasters have called rent declines an unfavorable trend through 2012, and commented on how the rents in place are tied, almost demonically to home price affordability. The commonly held view is that the strength of the housing market and the relationship between house price affordability and multifamily rent is sacrosanct, so much so that most analyst calls to the top 10 publics on rental play off of that theme.

I'm not so sure that's the case, and in fact it is beginning to look like the rental industry is gaining ground again. According to the most recent CSW data, the national composite home price rose approximately 2.9% on a quarter over quarter basis, not seasonally adjusted, and this is the first quarterly gain since the first quarter of 2006. According to the report, of the 20 metro areas surveyed, home prices increased in 15 regions, with Cleveland, San Francisco and Washington, DC leading the way. The prices are up, but not stunningly so in any metropolitan area.

Just for comparison purposes, I took at look at the September, 2009 Topline Report, courtesy of Pierce-Eislen. Starting with their San Francisco – Peninsula market I wanted to see how rental was faring overall against the newly released house price data. The average rent for September, 2009 was $1,658.96 overall, a decline from the prior month of $15.77. Rental concession participation rates, which I think is an excellent measure of demand strength, and only reported in Pierce-Eislen as far as I can tell, actually declined from 26.2% to 24.6%, probably indicating some positive trends coming in the next few months.

If you break down the rent numbers a bit further, the Topline report shows that at the Upper Mid-Range of properties, (those in the A- and B+ category), rents actually increased on both a month over month basis and their 3 month moving average. Since I was expecting to seek San Francisco still in trouble, the rent numbers overall and their composite sectors instead point to a positive outlook, at least incrementally.

I'm also interested in seeing what's happening in Washington, DC. Since the nation's capital is considered somewhat recession resistent, it wasn't surprising to see the city on the CSW list with house price increases, but rental in DC had taken a beating, and it made sense to see how the rents were now changing.

Again turning to the Pierce-Eislen data, (you can find all of this at www.pi-ei.com) rents in the Washington, DC-Suburban Maryland market averaged $1,263.14, a decline of $16.44 from the prior month. Using the same measure as before, all of the renter sectors declined, but again, on a three month moving average, the A- and B+ properties showed positive gains. What was really telling about the DC market is that the rental concession participation changed month over month from 45.5% previously, now down to 28%, demonstrating a different demand dynamic.

I now believe that rents are going to turn positive and there will be meaningful gains in certain metropolitan areas and submarkets, some appearing before the end of this year. I'm thinking that 2012 will probably look a whole lot different than what you're hearing at the industry conferences. My crystal ball is getting clearer but I still have a hard time getting it through security at the airport. As the forecasts are revised, just remember, we're talking about understanding the recovery, not fretting about the recession. Our internal forecasts and work show more progress in rent gains than anyone is expecting. I think it's about time.

(Jack Kern is the Managing Director of Kern Investment Research, and is fond of telling people he's called every recession, stock market decline and change in the colors of cars accurately since 1980. He can be reached at 301.601.1900 or Jkern@KernIRC.com)

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