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Mechanics of Housing Demand. Housing demand is driven by:Population growth (lately driven most by Katrina)Changes in average household size (extremely important)Depletion
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1. Louisiana Apartments Trends -A Brief Discussion D. Wesley Moore, II, MAI, CCIM
& Craig A. Davenport
Cook, Moore & Associates
2. Mechanics of Housing Demand Housing demand is driven by:
Population growth (lately driven most by Katrina)
Changes in average household size (extremely important)
Depletion & Replacement of the housing supply (physical and/or functional obsolescence of housing units). Dwelling units (structures) don’t last forever.
The mechanics of the equation start with the following:
Total population (# of people) divided by
average # of people per household = # of households
3. Katrina Effect Katrina may have the following effect on housing demand in BR:
Long-term population growth of 30,000+ (some economists project 50,000+, while, in the short-term, we still have roughly 75,000 extra residents) in the BR area as a direct result of Katrina (and Rita)
At an average household size of 2.75 people, this suggests we will need at least roughly 11,000 housing units in the BR area just to satisfy the incremental demand created directly by Katrina
Of these, roughly a third need to be rental units (based on historical norms), suggesting the BR market should be able to absorb at least 3,500+ apartment units before returning to its “pre-Katrina” state.
With an estimated 82,000+ rental units and 125,000+ owner-occupied units destroyed or severely damaged in the New Orleans area, the projection above may prove quite conservative.
4. Driving Forces Jobs, Jobs, Jobs
If you create jobs, people will move into (or stay in) the area to fill the positions and will need housing
Population growth, which ultimately drives housing demand, can’t be sustained perpetually without job growth
The Federal Government
Redevelopment aid and incentives from governing (primarily Federal) agencies will play a critical role this regard, ultimately driving the number of jobs in South LA (many related to construction) over the next several years.
5. Driving Forces (GO Zone Act) Gulf Opportunity Zone (GO Zone) Act
While the ultimate effects of this legislation have yet to really be seen, this sweeping incentive program (which includes 50% Bonus Depreciation in the 1st year for certain localized capital investments) could prove to have a profound effect on the rate at which housing in South LA is rebuilt.
Learn more at www.gozoneguide.com
6. Driving Forces Low Income Housing Tax Credits (LIHTCs)
Louisiana has historically received and administered enough Federal tax credits to facilitate construction of roughly 800 apartment units each year Statewide, of which roughly 100 were typically in BR
Under the GO Zone Act, the 2006 allocation to LA is 8 times the norm, which should facilitate construction of roughly 6,500 units Statewide each of the next 3 years (potentially totaling almost 20,000 rental units) and construction expenditures of $2 Billion, though most will be in the New Orleans and Lake Charles MSAs.
This “wild card” could potentially facilitate the construction of several hundred affordable housing units annually in Baton Rouge over the next few years - the recipients of the 1st round of credits will be announced in June or July 2006.
If Bonus Depreciation allowed under the GO Zone Act, depending on the interpretation and application of passive income rules, could further boost affordable housing development activity.
7. Apartment Rental & Vacancy Trends - Snapshot Rentals for a matched sample of 125 local complexes increased almost 10% from Spring 2005 to Spring 2006 (up from the normal 2% to 3%)
Vacancies for this same sample were reported at 0.21% in Spring 2006, down from 6% in Spring 2005
Concessions? What are those? Perhaps you overlooked our “No Vacancy” sign.
LA has attracted national spotlight (i.e., new developers, DR Horton, KB Homes)
8. Apartment Rental Trends Rentals for 1BR Units increased 8.0% in 2005-06
Rentals for 2BR Units increased 11.7% in 2005-06
Rentals for 3BR Units increased 9.4% in 2005-06
Concessions, which were common for upscale properties in 2003-04, are now virtually non-existent
9. Apartment Rental Trends When faced with a rental increase, tenants have essentially 3 choices. They can:
(1) Pay the new rent (after complaining, cussing, etc.)
(2) Move to another rental unit (good luck finding a unit available for which the rent has not increased)
(3) Purchase a house or condo – this is not an option for many tenants and for those that can buy, they are finding that home prices are up 12.2% on average over the 1st Qtr 2005 prices
10. Apartment Vacancies BRAA reported 7.9% citywide vacancy in Jan 2005
BRAA reported 0% Citywide vacancy in Jan 2006
LSU/CMA Spring 2006 Matched Sample Survey of 125 complexes reported overall vacancy of only 0.21% (down from 6% in Spring 2005)
As long as vacancies are this low, strong pricing pressures will remain (i.e., rents will keep rising)
11. Summary Prepare for several thousand apartments to enter the local market over the next 1 to 3 years. With the strong incremental demand generated by Katrina, the BR market can absorb them.
Rents will continue increasing, though likely at slightly lower annual clip than the torrid 10% seen in 2005-06. It should remain a “landlord’s market” over the next 2 or so years.
Concessions (rent specials) will be an ancient and forgotten tool for a while.
Vacancies will remain amazingly low through 2006. As we begin to absorb the new units that should come online in 2007 and 2008, vacancies should begin to return toward something resembling normalcy.