Well it’s 2014 and multifamily is still the darling of the commercial real estate industry. In spite of all the recent construction activity, the apartment market is still supply constrained and should post another year of strong fundamentals, according to panelists on the ‘2014 Kick-Off Webinar for Apartment Development’ hosted by Humphreys & Partners Architects.
“Overall, the supply is still lagging,” says Doug Bibby, president of the National Multi Housing Council. “We need a net of 300,000 new units in the market every year, and we got a little bit more than 200,000 in 2014. That is way short of what we need.”
According to Bibby, multifamily has been the preferred asset class in commercial real estate for five straight years. A pool of renters comprised of Millennials and downsizing Baby Boomers will fuel demand for years to come. As a result, there is still a lot of domestic and foreign capital looking to land in U.S. apartments. But is there a possible storm on the horizon?
In spite of the general supply constrained nature of apartments, Bibby points out that there is some concern that developers are overbuilding in certain markets like Washington, D.C., where job growth is not meeting the construction activity. The opposite is true in Dallas, for example, where there are 6 new jobs for every new unit that might come online, and there are 19,000 underway. Bibby adds that slow wage growth is also creating a demand for more economic rental options.
“We have got to be very mindful that we are creating enough choices and price points for people to move into apartments,” Bibby says.
Regulatory policy is another area that developers should keep a close eye on. While the two year budget deal is good for business, there is uncertainty regarding the GSEs, specifically if Fannie and Freddie will be taken out abruptly, over time or even in the near future. In addition, tax reform can always be dangerous and problematic for real estate. Another point of concern, according to Bibby, is a return to normalized fundamentals in the single family market.
“What happens when single-family underwriting reverts to what we call normal? By that I mean when people get frustrated that they can’t move houses fast enough and underwriting gets more relaxed. That is bound to happen at some point.”
Before looking into predicted market fundamentals for 2014, it is important for a quick recap of 4Q 2013. Greg Willet, vice president of research and analysis at MPF Research, points out that the industry was a bit nervous during the fourth quarter.
“In the fourth quarter of 2013 we were scheduled to finish out 75,000 units,” Willet says. “That is a lot of supply not a lot of demand.”
Willet points out that fourth quarters typically demonstrate a net move out, with between 30,000 to 50,000 units vacated. Luckily there were some delays in construction this year and only about 53,000 units were delivered in 4Q 2013. The end result was basically flat demand, with occupancies and rents ticking down a bit, though within seasonal norms. The general economy remains rosy in Willets view.
“We think it is going to be a good year for the economy, which means a good year for housing overall including apartments,” Willet says. “And we are going to need that to happen because we are going to deliver a sizeable amount of supply.”
But a look at some market fundamentals reinforces the notion that these new units will be absorbed nicely.
Occupancy leaders at the end of 2013 included Oakland (97.1); Minneapolis (96.8); New York (96.8); Miami (96.7); Portland (96.7); Northern N.J. (96.6); Providence (96.6); San Jose (96.6); San Francisco (96.5); Boston (96.3); Los Angeles (96.3); San Diego (96.3); Denver (96.2) and Nashville (96.0).
Rent growth leaders for 2013 included Denver (7.0%); San Jose (7.0%); Oakland (6.6%); San Francisco (6.0%); Seattle (5.5%); Miami (5.2%); West Palm Beach (4.9%); Austin (4.8%); Houston (4.4%); and Atlanta(4.3%).
Regarding overbuilding, Willet understands the concern but believes it to be temporary (except for perhaps in Washington, D.C.).
“I think 12 to 18 months from now we are going to be talking about perhaps building too little,” Willet says. “I think starts are going to trend down a bit over the course of 2014. There are concerns about overbuilding from our perspective. In most places it is a blip you are going to have to digest over the coming year, and then you are talking about product shortages after that.”
Scheduled units delivered will increase in 2014 to 235,000 units (out of about 310,000 total units under construction). Willet adds that the leasing environment is competitive at the top end on a neighborhood-to-neighborhood basis due to the proportion of new product situated in the urban core. Suburban properties should see their fundamentals realize a sharp improvement in 2014. He predicts overall rent growth at 2.6 percent for 2014. Middle markets will realize a bit of a higher bump in the 3.5 percent range, while top markets will be lower in the 2 percent range (with top urban core markets seeing sub 2 percent rent growth).
All of the construction has certainly been good for Humphreys & Partners Architects. The firm had 601 proposals in 2012. This figure jumped to 720 in 2013. A large portion of this 20 percent increase in proposals was comprised of the firm’s high-rise product (20 high-rise proposals in 2012 versus 70 high-rise proposals in 2013). Since Humphreys & Partners represents between 12 to 15 percent of all apartment development, this is a trend to keep an eye on.
“We are seeing construction costs for high-rise very flat at $175 to $200 per square foot, including the parking garage in most markets,” says Mark Humphreys, CEO of Humphreys & Partners Architects. “We are seeing the ‘Manhattanization’ of the United States.”
One of the things that is stirring high-rise is improved construction costs (at least on Humphrey’s designs). The firm uses a two corridor design that increases the floor plate efficiency and cuts down the length of the corridors.
“We are saving 2 to 6 percent of the overall efficiency,” Humphreys says. “This gets the floor plate to 85 to 90 percent efficient. You can realize around $2 million in savings per 1 percent of increased efficiency. If you adding 5 percent to efficiency you are saving $10 million.”
Markets like Kansas City, Minneapolis, Dallas and Oakland are adding these high-rises and are becoming 24-hour cities on their own right. These projects are able to fit on smaller plots, sometimes less than a quarter acre.
“We have a 29-story high-rise on the board in California,” says Humphreys “That is 629 units per acre. We are not even on an acre. We are not even on a half acre. We are not even on a quarter acre. This is important because there are many more half-acre and quarter-acres sites available in Dallas, in Irvine, in Los Angeles, in Nashville, than there are the typical three- or four-acre sites to do a wood-framed deal. We are using things on small sites like automatic parking that triples your capacity. This trend is happening now. High-rises are happening because they are closer to the core and where smaller sites are available. But it isn’t just that, it is the views.”