Multifamily Housing Demand on a Long-Term Upswing
Baby boomer lifestyle changes, immigration, housing affordability and the “non-traditional” composition of households are among factors that will contribute to robust demand for multifamily rental and for-sale housing for several decades, according to industry experts and economists addressing the Pillars of the Industry conference in Phoenix earlier this month.
“Housing demand will stay strong for the next 20 years,” said economist James Smith, of the Center for Business Forecasting at the Frank Hawkins Kenan Institute of Private Enterprise at the University of North Carolina-Chapel Hill.
Baby boomers are just beginning to enter the peak homeownership age brackets of 65-69 and 70-74, Smith said, and many will be seeking home buying opportunities in the multifamily market, which is well suited to meeting the needs and desires of empty nesters and smaller households.
A Growing Sector for KB Home
“Only 25% of families are traditional nuclear families” with two parents and children, said Bruce Karatz, chairman and CEO of KB Home. The 75% who don’t fall into that category are “interested in lifestyles that are different than that of the nuclear family,” making them more receptive to housing alternatives outside the single-family mainstream.
“I would say that condominiums are here to stay as a great choice for owners who don’t need to worry about their children’s education,” added Ron Terwilliger, chairman and CEO of Trammell Crow Residential, one of the largest builders of multifamily housing in the country.
Karatz said that his company is focused domestically on single-family homes, but it also builds multifamily housing here and has been building multifamily communities in France for more than 25 years.
“In the U.S., less than 10% of our overall activity is in condos, but it’s a growing percentage,” Karatz said. He added, however, that the overseas multifamily market is a less risky proposition for builders and developers than here in the U.S.
“I do not think that condo developers price enough risk into their pro formas,” he said. “When we build in France, we don’t start digging a hole until 40% of the units are sold, and then we transfer the risk to the buyer, who pays on a percentage of the project’s completion.” That practice is not legal in the U.S., he said.
Immigration and Job Growth Up
Immigration will remain a source of strength for the rental market for another 15 years or more, Smith said. The U.S. is currently experiencing “the highest percentage of immigrants since the 1920s,” he noted, and that has stimulated demand for both rentals and for-sale entry-level housing.
Higher interest rates and housing affordability woes are also key factors that will bolster the rental market, at least over the short term, Terwilliger said. “For 2006, rental demand will exceed supply by a wide margin. Why? Because job growth is up, completions are down and the premium to buy is way up,” to about 22% of income going toward principal and interest payments on a mortgage compared to only 16% of income for renting.
“Rents have not moved up, in absolute terms, in five years,” Terwilliger added, but they have moved up in hot markets for much the same reason that for-sale property prices have increased.
He identified the Florida communities of West Palm Beach, Ft. Lauderdale, Miami and Orlando, followed by Las Vegas; Riverside, Calif.; Los Angeles; and Orange County, Calif. as the markets where the highest increases in rents have occurred.
With land and construction costs on the rise, condo conversions have become a growing niche. “In 2002, no one was buying apartments to convert,” Terwilliger said. Three years later, conversions accounted for about a third of the dollar volume in multifamily acquisitions.
Good Help Is Hard to Find
One of the biggest challenges facing the multifamily industry is finding and hiring competent, experienced staff.
“Our biggest challenge is good people,” said J. Lindsay Freeman, COO of Archstone-Smith, which owns, operates and develops apartments in major metropolitan areas across the country. “The jobs in our company are becoming harder to do, and the competition for really good people is intense.”
Ronald Ratner, with Forest City Enterprises, Inc., a multifamily residential ownership, development and management company, agreed. The industry is more complicated than in the past. “The availability of really good people is key.”
Absolut Lofts photo by Al Ricketts, courtesy of Kobi Karp Architecture.