Wells Fargo’s Economic Outlook for 2012 – Apartment Development Lone, Unambiguous Bright Spot

December 16, 2011 at 9:31 am Leave a comment

Wells Fargo’s economic outlook for 2012 is posted on their website and they make some interesting observations, starting on page 5 of the report, about what they call “game changers” to the old economic framework:

From our viewpoint, three structural challenges in the domestic economy have limited the pace of economic growth in 2011 and are also likely to limit growth in the year ahead. In each case, the experience of this cycle is significantly different than in prior cycles, implying that decision makers must adjust to the new rules of the game.

First, the Great Recession exposed the credit dependency for the American consumer, the U.S. federal government and European sovereigns. Over the past 30 years, the broadening of credit availability provided the means for many households to spend beyond their income earnings in the hope of paying off those debts out of future income. This ended with the Great Recession.

Second, expectations for continued home price appreciation, built upon the experiences of the post-WWII period, set the tone for the strategy to buy a home today in anticipation of capital gains down the road. This ended with the Great Recession.

Finally, state and local governments had also anticipated that future retiree benefits and health care, woefully underfunded in many states and localities, could be paid out of future tax revenues.  Well, we know how this ended.

They go on to explain the thinking behind their hypotheses and it’s well worth the read if you want some insight into why this economic recovery has been so different from past recoveries, and how that might impact business in the coming years.  Of particular note is their outlook on housing – they see 2012 looking like 2011 – and their assessment of the prospects for apartment development:

Apartment construction remains the lone, unambiguous bright spot, and the recovery in that market still has quite a ways to go. Vacancy rates for apartments have fallen 1.5 percentage points to 5.6 percent over the past year and rents have increased 2.1 percent. Construction activity began to rev back up during the second half of the year and is expected to rise further in 2012.  Development activity is still being constrained by concerns about sluggish job growth and credit availability. Sales remain strong, however, and the relatively high prices apartment communities are fetching should keep the development pipeline growing.

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Entry filed under: Apartment Construction, Economy. Tags: , , , .

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