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CEOs: Governments, Economy, Pricing Top Worries

CEOs Top Worries 2018

By Les Shaver

This is the final article in Chief Executive Outlook, our series predicting industry trends in 2018.

In what promises to be a busy the economy, the industry’s leaders see threats from politicians, construction costs and rising prices among other things.

With single-family housing beginning to tick up in some of his markets, rising construction costs and a tighter labor market, Greg Mutz, Chairman and CEO of AMLI Residential predicts 2018 will be more challenging than at any time over the past seven years. As a bright spot, Mutz is optimistic about growth in the over-50 age group crowd’s interest in renting.

“We have been on a long run,” Mutz says. “Basically, the best run of my entire career. We are projecting that our same-store results will rebound a bit in 2018 [compared to 2017] but there will clearly be less than the strong increases than in the 2012 to 2016 timeframe. Our margins on development are coming back to Earth. 2018 is going to be a more challenging year. If you are trying to put together a strategic plan, you need to think longer and harder to generate attractive growth and margins.”

Others see apartment demand moderating in the coming years.

“I think the biggest issues are how the economy performs, job growth levels and rising interest rates in a slowing rent-growth environment,” Camden CEO Ric Campo says.

Rising construction costs, especially in a slow rent-growth environment, can cloud the picture. If costs are rising at 1 percent per month, as Jay Hiemenz, President and COO of Alliance Residential Company, says they have in California, it makes new deals harder to pencil out.

“How can we guarantee construction costs if we have a two-to-five-year entitlement?” says Ken Valach, CEO of Trammell Crow Residential (TCR). 

New supply, a common worry among owners over the past few years, and finding new deals concerns Bell Partners’ President Lili Dunn.

“The increasing amount of investment capital that has been attracted to the space is putting pressure on securing opportunities,” she says. 

Increasing prices are another worry.

“Pricing is very frothy, investor capital is plentiful—particularly on the value-add space,” Hiemenz says. “You have to be careful to select projects that you really believe can achieve your renovated rents, and that the capital deployed is really accretive to your return.”

Beyond the typical ebbs and flows of a peak (or past peak, depending on who you talk to) apartment market, is a less controllable issue—the situation in Washington.

“The dysfunction in Washington is a concern,” MAA CEO Eric Bolton says. “To the extent that we start to get a lot of disappointing news out of D.C. and a lot of the actions that we are hoping for don’t occur, you could see the business community and the broader economic engine pull back a little bit.”

Jeffery Lowry, COO for Madera Residential shares Valach’s and Bolton’s concerns about Washington, and also casts his eyes on local governments.

“The intrusion and interference of regulatory groups and the continual rise of local municipalities and state governments interfering with business operations with new laws worries me,” Lowry says.

Need an example? Look to California, where the effort to repeal Costa-Hawkins, which prohibits rent control on post-1994 apartment communities, is gaining steam.

“If it gets on the ballot and passes, which cities will then enact rent control and how it will look?” Valach says.

Beyond, slowing rents, jacked-up construction and acquisition prices and meddlesome local governments, is there anything else to be concerned about? Valach certainly thinks so.

“I worry about the unknown,” Valach says. “Some say it could be student debt and car loans and others say the Fed has to tighten monetarily. Our strategy is to develop the best risk-adjusted projects we can find. Long term that strategy has worked well”

Read the full Chief Executive Outlook Series