Multifamily's Urban-Infill Story May Be Oversold

Goodman: “Unless they want to spend a lot of money for private schools in the inner city, Millennials will look for suburban locations where schools are better, and they will be challenged to buy single-family homes.”

IRVINE, CA—The suburbs are beginning to attract Millennials , and since many can’t buy a single-family home , the apartment market is thriving because of them, PASSCO ‘s SVP acquisitions Gary Goodman tells GlobeSt.com. Goodman will be speaking on the panel session “Multifamily: On the Rise or At Its Peak?” during RealShare Orange County on August 16. We spoke exclusively with Goodman about the session, trends in multifamily investment and the impact of Millennials on this sector. GlobeSt.com: What surprising facts about the multifamily sector do you expect to come up during your session? Goodman: I think what will be surprising is the overwhelming support for a continued robust market. What people are nervous about with the market right now is the concept that, “Gee, we’ve been in a bull market for more than seven years, and how much longer can this last?” There’s some concern that we’re at the peak and all of a sudden we will be in some kind of downturn. But barring some major geopolitical event or recession, nothing would indicate that rents are going to fall or that cap rates are going to go up a lot, causing less investor interest in buying multifamily. In fact, all evidence points to the opposite. Is this the beginning of the end? We may have bit of a plateau in terms of rent growth, and on average rents are not going rise quite as quickly as a year ago, but that’s the average. We see a lot of foreign investment capital moving into multifamily, whereas this group hadn’t looked at multifamily before. I’m very optimistic about this sector, although I might be in the minority. GlobeSt.com: With so many different investors in the market, what should the smart multifamily investor do or look for in order to get a leg up? Goodman: It’s very important to understand that all real estate, especially multifamily, is very submarket specific. It’s very difficult to generalize, and that’s what’s great about real estate: it’s a local investment. You can say you’re buying in L.A., but where in LA? The submarkets there are multiple and all behaving in different ways. More than anything else, knowing your submarket is probably the most important factor. GlobeSt.com: As Millennials mature and start families, how do you think this will impact the multifamily market? Goodman: Another surprising thing: I think the urban-infill, transit-oriented development that is everywhere in the CBDs of cities throughout the country is an oversold story. What we’re finding is that the suburbs are frankly beginning to attract Millennials. They may be getting married and having children later, but at the end of the day, they will want to gravitate out to where the school districts are better. Unless they want to spend a lot of money for private schools in the inner city, Millennials will look for suburban locations where schools are better, and they will be challenged to buy single-family homes . Most of them want homes with yards, but the reality is their incomes aren’t as high as they want them to be; they’re still saddled with college debt, and the qualifications now for securing mortgages to buy homes are much more difficult to meet than they were seven or eight years ago: you need a higher down payment, incomes need to be higher, and they have student debt. We see suburban multifamily as having strong legs for the next 10 years. The other thing about suburban environments is that, counterintuitive to what most investors have subscribed to for the last several years, many of them have strong barriers to entry. Cities have provided tax incentives for new development, but when you get out into the suburbs—and Orange County is different from other suburbs—single-family owners don’t like multifamily in their neighborhood. They don’t like what it does to their schools or fire and police departments. In many suburban markets, there’s a better barrier to entry than in cities. Prior to the recession, it was harder to build in cities. But the number of properties in foreclosure in suburbs increased during the recession, and the renters of those kinds of properties were residents that single-family homeowners didn’t like. Today, many suburban communities have become cities—they have converted to cities and have put the kibosh on new development for multifamily. We’re seeing very solid rent growth and strong occupancies in those markets, but you can’t build more there. GlobeSt.com: What else should our readers know about multifamily as an investment category? Goodman: I think the other issue that favors investing in multifamily is that it is becoming a lot more expensive to develop. There’s a shortage of labor in most markets. Also, it’s getting much more difficult to finance new development; banks are requiring much more equity from developers in order to provide construction financing . And banks are having to reserve more of their capital now because of Basel II and III, which were set up some time ago. What developers are telling me is they are having a hard time getting construction financing now to develop new communities. I do get calls from developers looking at sites who are considering JV capital to support a new development. This will continue to keep supply in check while we have this increasing demand from Millennials as well as the Baby-Boomer cohort, who are beginning to retire and wanting to downsize and rent. They like urban environments, but a lot of Baby Boomers are renting apartments in suburbs where their grandchildren are. It’s like a barbell, with Millennials and Baby Boomers on either side, and both are in renting mode. Increasing demand from these two groups will keep supply in check. With developers leveraging development and redevelopment opportunities across all property types, how can you capitalize on this activity?  Join us  at RealShare Orange County on August 16^th for impactful information from the leaders in Orange County CRE. Learn  more . Steady gains in the US economy have resulted in net positives for the multifamily sector—will this wave continue for the foreseeable future? What’s driving development and capital flows? Join us at RealShare Apartments on October 19 & 20 for impactful information from the leaders in the National multifamily space. Learn more.