Can a Single Market Indicator Predict Rental Demand?

By: Brad Dulas

In any given year, a certain number of clients will ask an appraiser, land planner, consultant, or other estate professional to estimate how long it will take a planned apartment complex to reach stabilized occupancy or how long it might take an entire overbuilt apartment market to reach equilibrium in terms of balance in demand and supply. As new apartment construction pipelines swell throughout the United States and within the local Twin Cities apartment market, client requests for an accurate estimate of supply and demand trends have become more common and the professional’s conclusion begins to hold more weight. Professionals involved in these assignments rely on a wide range of techniques, methods, and formulas, with varying degrees of success, to reach their respective conclusions.

This begs the question of which technique, method, or formula is most successful in forecasting rental demand, and whether there is a single market indicator that can, in fact, predict apartment demand. In an article titled “Using Historical Employment Data to Forecast Absorption Rates and Rent in the Apartment Market”, published in Real Estate Issues1, the authors describe a simple forecasting technique based on the relationship between net new jobs created and apartment absorption rates. Charles Smith, Ph.D., Rahul Verma, Ph.D., and Justo Manrique, Ph.D., suggest that if one divides average annual job growth figures by average annual absorption of apartment units, one can forecast absorption rates over time.

We believe this technique bears further study. In the next edition of Valuation Viewpoint, we will investigate the proposed technique and explore additional options in forecasting apartment absorption.

1Volume 37, Numbers 2 and 3, 2012 of the Real Estate Issues Counselors of Real Estate Charles Smith, Ph. D., Rahul Verma, Ph. D., and Justo Manrique, Ph. D.