By Gail Kalinoski
The multifamily sector has grappled with any number of challenges this year: record-breaking natural disasters, policy uncertainties and concerns over affordability, to name a few. At the same time, it has also been a time of steady performance. Though rent appreciation has slowed in many markets, the industry has continued to post fundamentals that are solid, if variable. In recognition of these multiple currents, we have selected top stories of 2017 that are most likely to influence the industry in 2018 and beyond.
Weathering the Storms
One of the biggest impacts of the year was delivered by three late-summer storms: Harvey, Irma and Maria. Harvey alone inflicted an estimated $180 billion in damage after it hit land on Aug. 25, making it the costliest storm in U.S. history.
In Houston alone, Harvey damaged some 43,000 multifamily units, but most should be back online soon, reports John Sebree, first vice president & national director for Marcus & Millichap’s National Multi Housing Group. A wave of development has added about 80,000 apartments in metro Houston since 2012, and an estimated 55,000 were vacant when Harvey hit, but that will still likely fall short of the region’s needs. Additional fallout from the storms will come in the form of rising construction costs in Houston and elsewhere: 3 to 4 percent for labor and 4 to 5 percent for materials, Sebree estimates.
Irma followed on Harvey’s heels, causing damage in Florida estimated at $40 billion to $60 billion after it made landfall on Sept. 10. Single-family homes sustained the most damage leading, boosting an increased demand for multifamily housing that should keep rent growth positive in Florida’s major markets.
Room for Growth
Over the past few years, many observers have expressed concern that development was overheating, particularly high-end product in major markets. Recently, though, those fears have eased. A reduction in new product is bringing supply more in line with demand. As the Yardi Matrix U.S. Outlook 2017 report notes, deliveries have begun to slip mainly due to a labor shortage. Yardi Matrix revised its forecast for 2017 deliveries from 360,000 to 300,000 units and estimates that 480,000 units are under construction.
Jeffery Daniels, senior vice president & national director for Marcus & Millichap’s Institutional Property Advisors multifamily division, noted that the 10 largest markets accounted for 52 percent of the Class A supply built between 2015 and 2017. Markets demonstrating the highest growth include Denver (nearly 50 percent), Seattle (45 percent), Dallas (44 percent), Atlanta (35 percent) and the San Francisco Bay Area (25 percent). While some markets are reporting oversupply and slowing rent increases, Daniels predicted that the relatively healthy national employment picture should largely sustain absorption rates. “In time, we feel landlords will get that pricing power back, because supply is starting to wane,” he said. “Rents haven’t gone down, but the rate of growth has decelerated.”
The Affordability Crunch
Even as demand for affordable housing rises, stakeholders find themselves squeezed between reduced government funding and higher costs. “The cost of land in major urban markets has gotten so high that without some kind of major subsidy, it’s impossible to build affordable housing,” said Stuart Boesky, CEO of Pembrook Capital Management. Many government subsidies disappeared during the Great Recession, and as a result, “municipalities don’t have the money to offer direct subsidies the way they used to,” he added.
The recent decline in value of low-income housing tax credits means that 40,000 to 50,000 units a year won’t get built, Boesky estimates. The uncertainty over tax policy, the federal budget and other issues that followed the 2016 presidential election continue to influence strategy for affordable housing. Mehring reported that WNC’s underwriting assumes tax rates that “get investors comfortable and allow us to work with developers on structuring deals.”
One creative project financed recently by WNC is Fort Des Moines Apartments, a $40 million affordable community in Iowa’s capital city. Blackbird Investments, the project’s sponsor, is converting seven barracks and three stables at the decommissioned Army facility into 142 units.
To address the shortage, a growing number of municipalities are turning to inclusionary zoning, Boesky pointed out—more than 500 to date, with more likely to follow suit in 2018. An ordinance that took effect Feb. 1 in Portland, Ore., requires multifamily and mixed-use developments with 20 or more units to reserve some for affordable housing.
While the idea of shrinking an apartment’s footprint to the minimum isn’t brand new, a growing number of developers are recognizing that microunits can boost NOI and affordability.
This fall, National Resources opened Uno, an adaptive-reuse project in Yonkers, N.Y., just north of New York City. The 100-unit waterfront community, which occupies the 1923-vintage Otis Elevator Building and the 1933-built Herald Statesman Building, incorporates 50 apartments (billed as micro flats) ranging in size from 350 to 450 square feet. To maximize spaciousness, the units incorporate ceiling heights as high as 16 feet, as well as oversize windows and Murphy beds.
“The microunits are here to stay,” asserted Daniel Oberpriller, principal at CPM Cos. Since 2013, the firm has developed several micro unit-focused projects, and CPM’s pipeline includes three more that will deliver 260 micro units to the city in 2018.
Originally appearing in the December 2017 issue of MHN.