NAHB Forecasts Promising 2020 for Development

The positive apartment sector outlook was presented at IBS during Design + Construction Week.

Echoing a positive keynote speech by baseball legend and real estate investor Alex Rodriguez, the National Association of Home Builders’ (NAHB) forecasted a promising 2020 outlook for the apartment sector during the International Builders Show (IBS). A key takeaway from the Multifamily Market & Economic Outlook session during IBS January 19-23 at the Las Vegas Convention Center was that demand for apartments will fuel the multifamily sector in 2020.

Rodriguez, who is CEO of A-Rod Corp., which he founded in 2003 with the purchase of a single duplex, told IBS attendees that he has a new development taking place right now in downtown Miami. His Miami-based Monument Capital Management closed its first multifamily fund in 2019 with $21 million in equity. It also launched a $50 million investment fund focusing on workforce Class B and C housing to purchase existing apartments around the U.S.

Rodriguez’s optimism is shared by NAHB multifamily members and was bolstered by the association’s economists. According to IBS speaker and NAHB economist Danushka Nanayakkara-Skillington, assistant vice president of forecasting and analysis, apartment production has returned to pre-recession levels. Vacancies are low and more apartment homes will be needed going forward not only for low income renters seeking affordable options but also for market rate.

“Research shows that 22 percent of young adults—ages 25 to 34—still live with their parents, a trend that will continue to create a drag on household formation in 2020-2025,” added Nanayakkara-Skillington. “That group’s challenges in looking for an apartment can be attributed to student debt, rising rents or even competition with seniors who opt to downsize to a smaller home or apartment.”

Multifamily housing starts leveled off in 2018 in response to higher building materials costs, the need to pay higher wages to attract and keep skilled workers, and regulatory costs that make up a third of total multifamily building costs. Nanayakkara-Skillington noted that rents rose along with costs, resulting in more luxury communities and fewer affordable apartments. Developers have continued to respond to demand by building more apartments mainly in urban areas. In 2017 and 2018, most rentals were communities with more than 50 units. In 2019, multifamily starts were at 116 percent of the national average.

In spite of rising building materials prices, a shortage of skilled labor and local and federal regulatory constraints, NAHB economists anticipate rental production is expected to continue at near-present levels, with a 1 percent increase in 2020 and a 4 percent increase in 2021. The expected increase is in part because young people and retirees look to apartment living as a more affordable, low-maintenance option—preferably in walkable neighborhoods with opportunities for entertainment, services and social activities that suit their needs.

While condominiums might seem to be a good response for demand, developers have not significantly ramped up condo production. Millennials, who have started shifting away from apartment living and are now purchasing single-family homes, have helped push the homeownership rate back up to 64.8 percent, said Nanayakkara-Skillington. However, home prices do continue to hinder some millennials who then opt to rent. Rental rates are growing more slowly as supply increases. Rents are expected to continue to rise in 2020 according to NAHB.

Sharing the stage with Nanayakkara-Skillington was multifamily architect Sanford Steinberg, founding principal of the Steinberg Dicky Collaborative in Houston and Austin. “Apartment developers and designers are incorporating features into their communities like coffee bars, rooftop cafes and bars, bowling, indoor basketball and more,” said Steinberg. “The goal is to attract and retain the renters and ‘renters-by-choice’ who prefer a stimulating lifestyle in a great apartment community that offers all the amenities they are accustomed to in the home they lived in or strive to obtain.”

Understanding what renters want and knowing how to match lifestyle elements to demographics are key to multifamily developer success. So, in between education and networking, IBS attendees headed for the exhibit hall co-located with the Kitchen and Bath Business Show (KBIS). Together—under the Design + Construction Week umbrella—IBS and KBIS comprised more than 2,000 exhibits in over one million square feet of space.

From new modular construction methods and smart building security systems to budget-friendly materials that can simulate luxury in affordable units, Design + Construction Week 2020 brought many options and ideas together in one location. High end residential kitchen and bath trends tend to trickle down to the apartment sector. A day spent walking the IBS and KBIS show floors gathering ideas was a day well spent for the multifamily developer seeking to stay ahead of the competition.