Capital Insights with Jack Kern: The Apartment Whisperer


There is a distinction in examining renter trends that often gets overlooked. One of the smartest guys in this business is a research guru at a large owner, who bristles at the idea that there are "shadow markets." In conversations about rental markets, and rightly so, I believe, the point is made that in most metropolitan areas, there have always been renters in a wide variety of housing types and that no one is hiding in the shadows, even though that term has gained great popularity.

A leading expert in monitoring markets nationally, Greg Willett, MPF wunderkind and the sultan of statistics, observed recently that these shadow markets are showing up now in lots of places, as full competition to professionally managed apartment units. In the past, Greg would have told you it wasn't much of a factor, but now perhaps they're making great inroads as rental alternatives. The current pricing of these alternatives is a drag on professionally priced rents and the individual owners are beginning to make their presence felt. While they may not be good at delivering service, the greatly reduced rates more than compensate for the lack of amenities and sometime location challenges.

Historically, individually owned rental units rarely raise rents and operate in a somewhat irrational way. It is unlikely, based on behavioral finance studies, that these owners will change over time by very much. As the available inventory of these alternatives has skyrocketed, professionally managed ownership has to get better at luring that elusive renter.

The levels of traffic in most properties is reportedly down, sufficiently lower that the weakness isn't just attributable to seasonality, but to real softness in demand. The watch word for the present is management, but for those of us around in the developer fee fueled 1980s, it's certainly a contrast to prior periods. In most markets nationally, the long wait for Gen Y to come riding into town to rent vacant luxury units has proven to be painful. With little economic vibrancy, and lots of layoffs,  miscalculated employment growth and the instability in the industrial base, now is actually a better time to be a renter than an apartment owner.

While this trend is expected to be relatively short lived, the fact remains that treating residents well, and getting renewals down systematically is one of the keys to future net operating income. Expect major owners to report weakness and challenged earnings until the Fed policy response to the housing debacle begins to take hold. In the meantime, hopefully the Apartment Whisperer will be able to work hard to coax people out of the shadow inventory and into professionally managed buildings. As they said, "you got to treat them real nice and then they'll come to you."