ORLANDO—Multifamily construction is at a high in most markets and, despite tepid economic growth and questions about the pace of continued wage expansion, investors and developers are bullish about apartments in most markets. At least, that's what the participants in the development panel "Are We Overbuilding, or Building the Right Stuff?" had to say during the 2016 NMHC Apartment Strategies Outlook Conference, held here Tuesday.
Session moderator Jay Denton, SVP of analytics for Axiometrics, opened up the discussion with an examination of the development that's under way—and who's behind it. Denton counted 537,904 units currently under construction across the US as of mid-January. Top 50 developers, meanwhile, account for just a fraction of that, 160,804 units.
He also noted that whereas two to three times as many properties are being built in the nation's suburbs than the 36 urban core markets he tracks, the latter markets are seeing more housing units delivered. Most of the units that have been recently built are studios or one bedroom residences, more than what's in the existing stock proportionally. This has thus far made sense, said Denton, but "we'll have to rethink that as the demographics of the renter pool change"—e.g., echo boomers form families and need larger units, and baby boomers who downgrade from single-family homes into apartments will want more room in their rental units.
The questions Denton then posed to the panel was, is this sustainable, and is affordability an issue? Clyde Holland, chairman and CEO for Holland Partner Group, pointed to Washington State's Puget Sound area as an example. "The concentration of creative class jobs is remarkable" in the Seattle urban core, he noted, adding that the company only looks to build in urban walkable environments. Given the job growth in that region, and similar locations, the job growth is good enough to sustain the firm's plans. He noted that in the markets Holland Partner Group studies on the West Coast, every five to six jobs that are created creates demand for one multifamily unit.
Bill MacDonald is president and CIO for Mill Creek Residential Trust LLC, which concentrates on one- to three-bedroom units in urban, urban infill and TOD locations along much of the East Coast, Texas, Denver and the West, from San Diego north to Seattle. When it comes to affordability and overbuilding, he stated, "We were asking the same questions 30 years ago. We just keep doing the right thing and, while there are some stress levels, it's been working. Hopefully we'll keep doing the right thing."
There's even room to grow, MacDonald added. The average annual household income for his renters, he revealed, is $98,000, yet the average percentage of the income that goes toward rent is 23%—lower than the national average of 30%.
All the panelists in the session indicated that they—along with most of the customer and investor universe—prefer properties in walkable environments in close proximity to transport, employment and retail & entertainment. As Brian Natwick, president of multifamily for Cresent Communities, put it, "The theme for our portfolio is 'simplicity.'"
So for now, the primary focus is on urban environs. MacDonald did note, though, that there's a clear demand for suburban product, "but are you necessarily getting paid for it? Eventually you might, but not right now."
Where MacDonald does see an opportunity to get paid is in creative living and job environments in rapidly expanding urban centers, especially in the tech markets. Incomes in general, he explains, have gone up about 5.25% annually over the past 25 years, while apartment rents have gone up an average if 5.6% per year. In the technology-driven markets, however, average incomes have risen 7% while rents have risen only about 3%.
There may be new opportunities in expanding markets, but all few of the experts are planning to do anything radically different going forward. MacDonald, for one, said his firm is being cognizant that baby boomers will eventually become a greater component of the renter base, whereas the main impact of millennials won't be felt for another 15 to 20 years, since that will be the primary time they'll form households in earnest.
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Sule Aygoren
Aygoren oversees the editorial direction and content for ALM’s Real Estate Media Group, including Real Estate Forum and GlobeSt.com. In her tenure with ALM, she’s held roles of increasing responsibility, including Managing Editor. Aygoren has received several awards for her coverage including Best Trade Magazine Report from the National Association of Real Estate Editors and the James D. Carper Award for Young Journalists. Under her direction, Forum has received four national NAREE awards for Best Commercial Real Estate Trade Magazine.
