Fundamentals remain strong for the multifamily sector, but a supply increase leading to competition among landlords is putting pressure on rents and occupancies, according to Caitlin Walter, senior director of research at the National Multifamily Housing Council (NMHC) in Washington, D.C.
Walter spoke last week at the National Association of Real Estate Editors annual real-estate journalism conference in Las Vegas, as part of a panel discussing the latest trends in the multifamily sector (which also featured Revathi Greenwood’s CRE outlook). That panel, moderated by MHN Editorial Director Suzann Silverman, also included Robert Hart, president & CEO of TruAmerica Multifamily, and Jeff Brodsky, vice chairman of Related Cos.
Several trends are influencing the multifamily sector, household formation in particular, Walter observed, including:
- Households are changing shape. Today, there are fewer married couples with children. In 1960, nearly one-half (44.2 percent) of households consisted of married couples with children. In 2016, however, just 18.9 percent of households were married couples with kids.
- Young adults are living with their parents longer. That trend directly affects household formation. In 2007, about 19 million young adults were living at home. By 2015, that number had increased to more than 23 million.
- There are more lifestyle renters, or residents by choice. According to the NMHC/Kingsley Associates Resident Preferences Survey, 23 percent of residents surveyed said they prefer to rent because of the convenience and flexibility, while 10 percent said they want to avoid the maintenance responsibilities of homeownership and 7 percent said they like the amenities.
Walter said that there’s a need for 4.6 million new apartments by 2030 in order to keep up with demand. That’s an average of 328,000 new apartments each year.
Need for workforce housing
Hart said that TruAmerica is focused on workforce housing—market-rate apartments with no subsidies—“because it’s really where blue and gray America live.”
Rather than building new, TruAmerica looks for existing apartment communities that need rehabilitation—so-called value-add opportunities. “We try to rebuild something that meets the market,” Hart said. He added that tenants are more discriminating today and won’t accept rehabbed housing that still has older features in kitchens and baths.
The firm not only improves aesthetics in its communities but also adds further amenities, such as gyms and dog parks—“amenities that create a home-like feeling,” Hart said. “We try to do it very affordably to preserve the cash flow necessary to meet demand,” he added.
Brodsky, of Related Cos., takes a different approach. As a successful market-rate developer, Related also tries to include a palette of apartment product for the cities in which it’s active. Often, Brodsky said, cities will specifically request workforce housing for their police officers, nurses and teachers, so Related tries to fill that “donut hole” of workforce, or mid-market, product. He pointed out that most new multifamily product is being built in the CBD but that workers in the suburbs are in need of apartments.
Affordability remains a problem
The panel focused their discussion on affordability. According to data provided by Yardi Matrix based on the 127 markets it tracks, average rents as of April were $1,381 per month. However, despite the continued rise of monthly rents, rent growth is slowing. In April 2016, monthly rents were increasing by more than 5 percent year-over-year. By April 2018, however, growth had declined to less than 2.5 percent. The decline in rent growth is attributable to new apartment supply in many markets and increased competition among landlords.
Despite the new supply, the panel said affordability remains a concern—and not just in gateway markets like New York and San Francisco. “This is not just in a few cities around the county,” said Brodsky. He cited Denver, which has a serious affordability problem, as well as Miami, which he said has the highest percentage of rent-burdened residents in the nation.
Hart said that employers are beginning to respond to the affordability crisis. “We are starting to see in major cities a movement of whole companies or a portion of them to areas that have higher affordability,” he noted. No-tax states are also benefiting because they allow employers to create a work environment that is more affordable.
Rising development costs
Of course, the cost to build an apartment project directly impacts the affordability of rents because developers need to maximize their return on investment, and one of the most rapidly increasing costs of development are regulatory fees.
According to new research released last week by the National Association of Home Builders and the NMHC, regulation imposed by all levels of government accounts for an average of 32.1 percent of multifamily development costs. In a quarter of cases, that number can reach as high as 42.6 percent. These costs include building code changes, development requirements such as streets and sidewalks, and non-refundable fees charged when site work begins.
Brodsky noted that until cities demonstrate that they are serious about removing barriers to construction, developers will continue to build elsewhere.
The investment climate
The panel also discussed the investment climate. Brodsky said that there is about $50 billion to $60 billion of unallocated capital that wants to go into real estate and that strong investor demand is driving up asset prices—and lowering investor returns.
Hart noted there is tremendous competition for desirable assets. Capital is flooding the market, he said, including from huge money-management firms that are keen to enter the multifamily sector, as well as from foreign and domestic sources.