7 minute read
Pulse on the Marketplace— Recession Lurking?
Pulse on the Marketplace
A Quarterly Review of Key Financial Data for the
Apartment Data
Total Apartment Sales Transactions
Total Sales Volume
1st Quarter 2022 Update
1st Qtr 2020 Orange County 1st Qtr 2021 1st Qtr 2022 1st Qtr 2020 USA 1st Qtr 2021 1st Qtr 2022
25 60 55 3,105 3,357 4,256
$166 Million
$773 Million
$680 Million $39.5 Billion $35.7 Billion $58.2 Billion
• Actual Average Cap Rate 4.39 3.91 4.03 5.42 5.30 4.50
• Average Gross Rent Multiplier 14.29 15.58 16.52 13.71 14.12 14.95
• Price per Square Foot $299.07 $381.50 $460.31 $162.69 $152.74 $213.86
Data Source Qualifications
Source: Co-Star www.costar.com 5 unit + properties
• Price Per Unit $248,558 $362,728 $400,615 $157,987 $150,986 $211,737
Average Rent Level
$2,154 $2,177 $2,590 $1,436 $1,425 $1,633 Source: RealPage, Inc. www.realpage.com Annual Effective Rent Growth 3.2% 0.6% 18.1% 2.8% –0.9% 15.2% Primarily 100 unit + properties; “concession percentage” is the Concession Percentage 2.7% 3.8% 6.1% 3.6% 6.0% 5.8% percentage of units offering concessions.
Average Occupancy Rate
Average Monthly Employee Wages** 96.4% 96.8% 98.7% 95.5% 95.5% 97.6% Source: RealPage, Inc.
$4,960 $5,208 $5,477 $4,297 $4,516 $4,764 Source: US Bureau of Labor Statistics; uses private sector wages, last month of quarter;
not seasonally adjusted
Apartment Building Permits Issued by total # of units (not buildings)** 2–4 Units 521 479 510 10,000 12,600 12,500 Source: U.S. Census Bureau: Privately owned, 5+ Units 4,651 6,182 3,229 99,500 118,400 142,400 new construction
Consumer Price Index*
Unemployment Rate** 1.9% 2.2% 8.5% 1.5% 2.6% 8.5%
6.1% 9.6% 4.5% 4.4% 6.0% 3.6% Source: U.S. Bureau of Labor Statistics; % change using last month of quarter versus same month one year previous Source: U.S. Bureau of Labor Statistics; reflects last month of quarter
Pulse on the Marketplace is produced and edited exclusively for Apartment News by Nick Lieberman, President, Bona Fide Mortgage and AAOC Board Member. For questions or comments: (949) 651-0999, or nlieberman@cox.net
* For CPI, “Orange County” includes Orange, Los Angeles, and Riverside Counties. ** For Apartment Building Permits, Average Monthy Employee Wages and Unemployment Rate, “Orange County” includes the Los Angeles–
Long Beach–Anaheim, CA Metropolitan Statistical Area.
e Marketplace
Recession Lurking?
Depending on who you listen to, this may be one of those when, not if, situations.
Government messaging offers a somewhat sanguine narrative, implying that while a near term recession is possible, it’s certainly not inevitable. By contrast, leading private sector voices seem to suggest that an economic contraction by 2023 is more likely than not.
Of course, the atmospherics will likely change in coming months as the Federal Reserve engages its interest rate levers, the war in Ukraine evolves, and the global significance of Covid becomes further defined.
A core consideration in all recession prognostications is inflation and the question of whether it has peaked. As of this writing (6-12-22), the Consumer Price Index, the most commonly used metric for measuring inflation, reflects an 8.6% jump from a year ago. The May 2020 figure was the sharpest upward annual increase in forty years.
The adjacent chart shows economic data at close of first quarter 2022, at which time annual CPI checked in at 8.5%. It then declined to 8.4% in April engendering hopes that inflation might indeed have peaked. Those hopes were dashed a month later with May’s announced 8.6% spike to a four-decade high.
The Federal Reserve and its chair, Jerome Powell, are the first responders in battling high inflation. The Fed, chartered by Congress in 1913, has two primary missions: (1) minimize inflation, and (2) maximize employment.
No problem on the employment front at this point. As the chart indicates, a miniscule 3.6% unemployment rate for the nation prevailed when first quarter ended, which has remained in place through May. In fact, US employment is so strong that there are currently twice as many jobs available as individuals looking for work. As good as those numbers are for the American work force, tight labor markets can facilitate an overheated economy, which in turn can trigger inflation surges.
Interest rate hikes are the blunt instrument wielded by the Fed when inflation suppression is called for. It has used said instrument twice so far this year, but markets are now expecting Powell and company to strike another four to five times in 2022. Those actions will likely lift bank prime rate to about 6%. Bank prime rate was 3.25% in January and is 4% at present.
Meanwhile Freddie Mac’s 30-year fixed rate home mortgages, which averaged 3.45% in January, have so far risen to 5.54%, and are widely expected to reach 6% by year end.
If you hit interest rates hard enough, spending will eventually be inhibited, an outcome fervently desired by the Fed at this time. The foundational concept: Inflation is caused by too much demand chasing too few available goods and services, so by shrinking aggregate demand you counteract inflation.
And this is where the recession calculus comes into play. While the U.S. economy is currently projected to grow 3.1% in 2022, raising rates too aggressively could potentially choke off spending so severely that the economy reverses course and downshifts into contraction, i.e. negative growth, and that would trigger substantially higher unemployment rates and disproportionate hardship on the poorest Americans.
The end game that the Fed and everyone is hoping and praying for is the proverbial “soft landing” where higher interest rates slow but don’t kill the economy, supply and demand come back to a healthy alignment over time and inflation subsides back to the good old 2–2.5% annual level we enjoyed (and somewhat took for granted) the past quarter century, at which juncture interest rates would decline as well.
But anyone who thinks the Fed’s job is easy, or that there’s an algorithm somewhere that can fix everything. is unrealistic. Managing a $25 trillion annual economy is an inexact science and, truth be told, involves some elements of trial and error.
My own sense is that the die is cast and that an economic pullback awaits us around the bend. That said, we can take solace in that our banking and financial systems seem on solid ground, unlike the years that preceded the great recession of 2008–2009. This positions the nation, as a whole, to better weather the storm this time round. As to the apartment sector, it’s expected to survive the turbulence as well as any asset class given projected long term housing shortages that make the industry more recession resistant than most.
By niCk lieBerman
expenses, or liability for deaths and injuries — all of which would have significantly increased the cost-tobenefit ratios.
If your building is vulnerable, seismic retrofits make good business sense. In fact, the National Institute of Building Sciences in its report, Mitigation Saves, estimates that for every dollar spent on mitigation, society sees a resilience benefit of $13 dollars or more.
You can start developing your plan by finding out how great a risk your apartment building faces. Arrange your free consultation by visiting optimumseismic.com for more information, or calling 323-978-7664.
About the Author: Ali Sahabi, a licensed General Engineering Contractor (GEC), is an expert in seismic resilience and sustainability. He is Co-Founder and Chief Operating Officer of Optimum Seismic, Inc., which has completed more than 3,500 seismic retrofitting and renovation projects for multifamily residential, commercial, and industrial buildings throughout California.
President’s Message — continued from 4
local level can help deliver votes. Frankie: It really is up to us. Good point. So, tell me Chip, what are the most important races you see coming up this November, where AAOC can really make a difference? Chip: We need to take every race seriously. Just look at the 2nd Supervisorial District — the Santa Ana mayor who advocated for rent control is running for Supervisor and he will be in the runoff election for that seat this fall. This is what happens. These candidates start small, at the local level, and they move on to larger, higher-profile, and more influential positions.
If they’re good candidates for us, that’s a good thing — like Janet Nguyen, who has served as a city council member, county supervisor, state assemblymember, and is now running for State Senate in District 36.
If they’re bad candidates for us, it can be a disaster that we spend decades cleaning up from and dealing with the aftermath.
Frankie: Thank you, Chip, for being here for our members, and for making yourself available if they need assistance, or guidance on getting involved, or a better understanding of what our government is doing for us — or to us.
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