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Can Leading Economic Indicators Help Predict Apartment Rent Growth?

Can Leading Economic Indicators Help Predict Apartment Rent Growth?

In August 2014, Google made a bold move when it acquired satellite imaging company Skybox for $500 million. Skybox specializes in satellites that capture high-resolution images of anywhere on Earth. When added to Google’s portfolio of gadgetry, Skybox has the potential to increase the accuracy of the Google Maps application. But the technology can be used a multitude of other ways. The satellite imaging could be used, for example, to monitor and measure oil tanker activity in Saudi Arabia to give insight into the direction of energy prices in the near future. It could even verge on arbitrage opportunities, such as monitoring crop fields to peg agricultural prices several months in advance. In other words, it could be used to gather information on any number of things that have the potential to influence something else in the future – which would prove extremely valuable for predictive insight.

Much like the things that Skybox could monitor and provide insight into, there are predictive variables for the national economy. As a group, these variables are called the Leading Economic Index (LEI). The LEI is made up of 10 primary leading economic indicators that can give investors a peek into future market trends. The LEI uses measurements such manufacturer’s orders, initial unemployment claims, consumer sentiment, housing permits and other variables as a way of peering through the economic windshield to see what’s down the road.

Of course, the national economy has great influence on a number of things – including the apartment market. MPF Research decided to explore the Leading Economic Index to see what, if anything, it would say about future apartment rent growth.

LEI Growth - 1

Since 2000, apartment rent growth has trended closely to the Leading Economic Index. In fact, significant shifts in the LEI typically occur two to three quarters before the pattern occurs in apartment rents. So what does that tell us about the future? Potentially a lot … but first, a disclaimer: MPF Research’s forecast models look at unique drivers in each market, and are not dependent on a singular variable like LEI nor do they bank entirely on simple correlations like LEI to rent growth. Obviously, macroeconomic factors shape apartment performance but the exact measures and impacts have been proven to vary from period to period and market to market.

LEI Growth - 2

That disclaimer aside, LEI growth has slowed of late. So does that suggest apartment rent growth – currently near long-term highs – could follow in the same direction? That has been the industry consensus from surveys of real estate executives by PREA and ULI, among others. MPF Research’s base outlook assumes the same, but not as quickly as LEI and industry consensus would suggest. Every cycle is different, and with so many demographic tailwinds and limited for-sale inventory in this cycle (among other factors), MPF Research’s view is that rent growth won’t materially slow down especially soon. To that point, LEI and apartment rent growth have moved in opposite directions over the past couple quarters. And we saw an impressive start to the spring leasing season this year.

When rent growth does slow down (and it certainly will) later in 2015 and into 2016, the cooling should be fairly moderate bearing a much bigger economic slowdown.

(Image Source: Shutterstock)

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