Econ 2018 Kicks off AAMD’s 50th Anniversary
The 2018 AAMD Economic Conference was the official kick of the Apartment Association’s 50th Anniversary, where over the course of the year several activities and celebrations are planned. The first ever “Golden Loyalty” Award was presented to Standard Interiors for 50 years of membership to the Association.
General Manager Jenny Jacobs and Owner Robert Hempel accepted the prestigious award from Executive Vice President Mark Williams.
Conference Chair, Judy Blaes welcomed over 450 attendees to the annual forecasting conference where a diverse lineup of experts presented data, analysis and opinions about the upcoming future of the economy and the industry.
Decisions for Industry Investors
Marcel Arsenault started with an overview of the market, including a description about the importance of how the apartment industry is driven by job growth. The excellent job growth in Denver (over 3% per year) has been a critical piece of the success of the industry over the last eight years.
Arsenault described how the Federal Reserve has done the job of stimulating the national and local economy by keeping interest rates low, but now the Fed has completed its job and will be raising rates in 2018, which could signal changes, including a recession.
Arsenault eluded to a recession in 2020 and had some advice for apartment investors.
Self-proclaiming a negative perspective on apartments- Arsenault predicts job losses (slowing employment growth), leading to lower occupancy, leading to lower rents, and reduction of loan payments. He illustrated how the “end of easy money” over the next couple of years would increase cap rates and slow investment in apartments.
He called the tax bill a short term “sugar rush” that would help, but only be temporary. Others may view a reduction in the corporate tax rate to 21%, more substantial than a sugar rush, but we shall see.
Some other key observations from Asenault included:
- Single-family inventory are constrained and the low supply has led to an increase in demand and price of a home (and apartments)
- Multi-Family housing permitting in 2016 and 2017 was extraordinarily high and he predicts approximately 12,000 new units will exceed demand, and frame Denver as over-built
- Rent Growth is at its lowest rate since 2010, with concessions persisting and both rent and occupancy falling
- Downturn in values are 1 to 3 years away, which makes 2018 a good time to sell
- Millennials are moving to the suburbs, but it will take them ten years to get there
- Increasing interest rates will lower the amount of cash available for multi-family investment
Arsenault wasn’t all “doom and gloom”, however, and offered the following positives for our industry:
- Single family houses are expensive and SF permits are under trending
- Tax Bill will delay the recession 1-2 years
- US Gross Domestic Product is increasing, which will keep job growth strong
- Oil jobs are recovering in Colorado
- Capital is currently abundant
Arsenault offered the following advice:
- Refinancing and lock in rates in 2018
- Accumulate cash and be ready to adjust and respond to opportunities
- Keep your banks happy as you ride through the cycle
- Don’t have your pedal to the metal right now, but in the meantime find great operation partners and get ready to pile back into apartments when the opportunity strikes
- Some opportunities will exist in the condo market, conversions will be tough for anything new
4th Quarter Vacancy & Rent Report
Chris Geer and Teo Nicolais teamed up again to review all of the vital stats from the 4th Quarter 2017 Metro Denver Vacancy and Rent Report.
Average rent was down $16/month at $1,396. Vacancies were up a full percentage point from 5.4% to 6.4%. Nicolais described how most companies manage around that 94% occupancy rate, so once vacancies go above 6%, we begin to see rent reduction and additional concessions and discounts. Geer noted that some of the trends are tied to seasonality - “it happens” during the fourth quarter like this quite often. The duo illustrated how some of the headlines have been really pressing for more affordability, and that the supply chain will drive this naturally if allowed. Over the course of the last year rents have increased but right at rates of inflation.
Nicolais described the metro area as a patchwork market in terms of highest rents and lowest rents from quarter to quarter really popping up in different submarkets based upon construction and delivery of units in those submarkets.
An excellent and informative panel of industry experts discussed development trends. The panel included Kenneth Ho, Tim McEntee and Jeff Wickstrom, and was moderated by Terrance Hunt.
The panel discussed how land deals are getting tougher and tougher on two fronts- both the challenges with the different cities and municipalities and the less sophisticated land owners. The cities end up having so many different priorities and agendas that it’s tough just getting deals to go through without making significant concessions that lead to challenges with design. The holdout land owners sometimes think their value is much higher than the going rate, so this makes it increasingly more difficult to get deals done.
The talent pool is getting thin. Both talent in design and construction is really getting tough to find. Delays are getting tough right now too. Delays are typically forcing completion timeframes out at least 6-12 months late.
The panel offered the following advice:
- Get your design group in front of the city much earlier
- Engage with the city at least 18 months before the deal is ready
- Spend more time with the younger people in your operation and listen to what they say
"Don't Be Disrupted, Be the Disrupter!"
Michael Dominguez, Chief Sales Office for MGM Resorts international presented a fascinating overview of how to connect the dots in this crazy high tech and political world.
Dominguez outlined the largest challenge as the ability to adapt and speed at which we all have to be willing to change. If you’re still operating with last year’s strategy, you’ll soon become obsolete. In one single “internet minute” there are: 16 million text messages sent, 3.5 million Google searches, 1.8 million Snapchats, nearly 1 million Tinder swiped and 342 apps downloaded. You better keep up! Half of the Fortune 500 companies since 2000 haven’t kept up, and have since disappeared.
Dominguez illustrated the rate at which humans are able to adapt compared to the rate of technology- humans simply cannot keep up with this rate of change. Michael tossed in several quotes, including Charles Darwin’s classic - “it is not the strongest of the species that survives, nor the most intelligent… it’s the one that is most adaptable to change.”
Dominguez cruised through an excellent analysis of the hotel industry and how it compares to the apartment industry. Hotels are experiencing record occupancy rates and have since 2009- with each year the number of occupied hotel rooms increasing year after year.
Dominguez also discussed his view on the stock market, the debt of the Chinese, tax reform, what companies like Walmart, AT&T, Amazon, Netflix, Nordstrom and Apple are up to, and the grand political theater we are witnessing. With all the constant change in Michael’s areas, it won’t be long before we ask him back for an encore at a future Econ.
Thanks to all the great speakers and sponsors of Econ2018!