Green Street's CPPI forecast suggests that real estate asset values will be flattish over the next six to 12 months. Bragg said that when the private and public markets understand each other, it helps each sector produce results.

Wagner took over, saying that apartment-sector fundamentals began to decelerate RevPAF growth in 2016, and this trend will continue. Early 2017 leasing trends indicate continued deceleration. In the coming years, Green Street's estimates for growth will be well below those of other forecasters, with the bottoming out of the homeownership rate contributing to this.

Income growth picked up in 2016, but strong relationship between income growth and job growth leaves us focused on the former, said Wagner. Growth in household formation has been slower to return this cycle than the last, but will be relatively healthy on an absolute basis, the firm forecasts, predicting that this figure will stabilize at 62.7% in 2018. Households are renting longer as young adults wait to marry and have children, but recent data points to a potential plateau in the age of first marriage. “Cyclical drivers powerful for this cohort.”

Student debt is contributing to young people living at home with their parents, which decreases the likelihood of owning a home, Wagner continued. The number of young adults living at home is elevated. Also, since many parents have already borrowed money to help their kids, they can't borrow more to help with a down payment, which increases apartment demand.

With regard to housing affordability, costs are still favorable relative to the long-term trend. Many affordability studies focus on rent versus principal, but down-payment costs are still an issue. But affordability isn't the only deterrent to single-family-home occupancy because renting a single-family home is not cost prohibitive; people have the option to rent if they are unable or unwilling to buy.

In discussing apartment-REIT data, the percentage of departing apartment residents who left to buy has bottomed out, since come up, but has not returned to levels seen before the housing bust. Moving out to rent a single-family home is becoming an increasingly viable option, Wagner said.

Regarding apartment supply, Wagner said we should keep a close eye on this factor, since there is a disproportionate share of urban supply relative to urban. Completions should peak in 2017, with a 1.9% expansion of stock. Completions in 2018 will be down, but not dramatic.

Expected returns in gateway markets are seen as virtually identical to non-gateway markets, and while Fannie and Freddie percentage has decreased, this year should be orderly, Wagner said. Congress will have to address the GSEs' status, but should they pull back or exit the multifamily space, REITs would see their cost-of-capital advantage grow, which could cause them to become more active.

NEWPORT BEACH, CA—If Fannie Mae and Freddie Mac were to pull back or exit the multifamily-lending space, apartment REITs could see their cost-of-capital advantage grow, an incentive for them to increase their participation, Green Street Advisors analyst Conor Wagner told attendees at the company's latest webinar Tuesday, “What's in Store for Apartments in 2017 and Beyond?” The webinar focused on how the apartment sector's fundamentals look for this year and into the future.

Managing director Dave Bragg began by talking about real estate asset values in general, saying that the firm's Commercial Property Price Index indicates that the US property market has enjoyed a robust recovery, with asset values at 27% above the prior peak. However, asset-value growth has slowed over the last several years, with apartment values only up 1%. He said transaction activity will probably slow over the next 12 months, evidenced by the slow start to the year. Slowdown in asset-value growth can be attributed to the flattening out of cap rates. Some primary markets that are late in their real estate cycles are seeing slowing job growth, while widening of the spread between class-A and -B cap rates has been observed in many markets.

The key component of return expectations is long-term growth, Bragg said, and thoughtfully derived long-term growth estimates are critical when you consider that the value of a property seven years hence can be two-thirds of its current value.

Putting things in context, Bragg said real estate looks fairly priced relative to investment-grade bonds and slightly cheap with regard to high-yield bonds. The public REIT market has historically been a good predictor of the direction of private-market asset values. While the REIT market isn't always correct, its signal is most powerful at its extremes, and today at the sector level, we see great divergence in discounts to asset value.

Green Street's CPPI forecast suggests that real estate asset values will be flattish over the next six to 12 months. Bragg said that when the private and public markets understand each other, it helps each sector produce results.

Wagner took over, saying that apartment-sector fundamentals began to decelerate RevPAF growth in 2016, and this trend will continue. Early 2017 leasing trends indicate continued deceleration. In the coming years, Green Street's estimates for growth will be well below those of other forecasters, with the bottoming out of the homeownership rate contributing to this.

Income growth picked up in 2016, but strong relationship between income growth and job growth leaves us focused on the former, said Wagner. Growth in household formation has been slower to return this cycle than the last, but will be relatively healthy on an absolute basis, the firm forecasts, predicting that this figure will stabilize at 62.7% in 2018. Households are renting longer as young adults wait to marry and have children, but recent data points to a potential plateau in the age of first marriage. “Cyclical drivers powerful for this cohort.”

Student debt is contributing to young people living at home with their parents, which decreases the likelihood of owning a home, Wagner continued. The number of young adults living at home is elevated. Also, since many parents have already borrowed money to help their kids, they can't borrow more to help with a down payment, which increases apartment demand.

With regard to housing affordability, costs are still favorable relative to the long-term trend. Many affordability studies focus on rent versus principal, but down-payment costs are still an issue. But affordability isn't the only deterrent to single-family-home occupancy because renting a single-family home is not cost prohibitive; people have the option to rent if they are unable or unwilling to buy.

In discussing apartment-REIT data, the percentage of departing apartment residents who left to buy has bottomed out, since come up, but has not returned to levels seen before the housing bust. Moving out to rent a single-family home is becoming an increasingly viable option, Wagner said.

Regarding apartment supply, Wagner said we should keep a close eye on this factor, since there is a disproportionate share of urban supply relative to urban. Completions should peak in 2017, with a 1.9% expansion of stock. Completions in 2018 will be down, but not dramatic.

Expected returns in gateway markets are seen as virtually identical to non-gateway markets, and while Fannie and Freddie percentage has decreased, this year should be orderly, Wagner said. Congress will have to address the GSEs' status, but should they pull back or exit the multifamily space, REITs would see their cost-of-capital advantage grow, which could cause them to become more active.