January 24, 2011
Nation's Building News

The Official Online Newspaper of NAHB

Multifamily Housing
Rental Apartment Building Still at a Trickle as Demand Rises and Supply Tightens

In the face of rapidly improving demand for apartment rentals in many parts of the country, multifamily developers are increasingly optimistic about their business prospects as the economy continues to recover, according to panelists at the recent NAHB International Builders’ Show in Orlando.

Unfortunately, lenders still don’t see it that way and continue to deprive multifamily builders and developers from the credit they need to break ground on projects that will be badly needed by the time they are completed.

With a few years needed to move buildings through the pipeline from the time they are proposed to when they are completed, it is already too late to prevent tightening in many markets, where double-digit rent increases will be the likely result.

“Although we are forecasting construction of 133,000 new multifamily residences in 2011,” said NAHB Chief Economist David Crowe, “that is far short of the 250,000 to 300,000 units that would be required to keep supply and demand in balance.”

Also, he said, “we have yet to make up for the insufficient number of new apartments that should have been built over the last two years. The capital needed to finance that construction is just not available to apartment developers.”

Trailing the downturn in single-family production, multifamily starts in buildings with two units or more toppled from 284,000 units in 2008 to 112,000 in 2009 and 114,000 last year, hitting a low seasonally adjusted annual rate of 76,000 in the fourth quarter of 2009.

After a 16% increase in multifamily production in 2011, NAHB is forecasting a considerably more substantial 53% gain to 203,000 units in 2012. But even then, the new supply will fall significantly short of the rental apartments expected to be needed over the longer term.

“In 2010, we didn’t produce enough multifamily to replace what we lost,” said Crowe.

Multifamily developer Bill McLaughlin, executive vice president of the Avalon Bay Company, a Real Estate Investment Trust headquartered in Washington, D.C., also said he sees demand for apartments on the upswing and also cited “a woefully inadequate supply” of new rentals coming out of 2009 and 2010.

McLaughlin noted that the impact of the ongoing period of sub-par multifamily production will have an especially pronounced effect on traditionally supply-constrained areas of the country.

“Demand pressures are building and rent increases are taking hold,” McLaughlin said, with the markets approaching double-digit rent hikes comparable to those occurring in 1992-1993 that resulted in people relocating to less expensive areas.

In locations such as Boston, Washington, D.C., and the West Coast, he warned, there is a longer pipeline. “If we break ground today, delivery won’t be until 2012-2013. Looking at breaking ground in 2013, delivery will be n 2015.”

Noting that private development firms have borne the brunt of the constrained supply of capital, Jay Jacobson, national partner for acquisition and investment for Wood Partners, Boca Raton, Fla., said, “The market is telling firms to build and acquire, but capital is still extremely difficult to find.”

With “lease-ups on new construction ahead of projected paces,” Jacobson said, rent increases are up 4% in many markets, and “some are trending to 7% to 8%.”

Wood Partners' properties in Miami are now seeing occupancy rates hitting 98%, pushing yearly rent increases to 5% to 7%, and concessions for signing a lease are gone. He cited one building with more than 300 units filling up at a pace of 60 apartments a month.

For many, “it is impossible to buy a home and it is darn near impossible to get a mortgage these days,” Jacobson said. And there is a “huge” population of 18- to 24-year-olds poised to form households and enter the housing market as renters.

“This is about the perfect storm for the apartment business,” he said, but he voiced trepidation about the ability of these prospective renters to be able to afford housing without substantial improvement in unemployment levels, which have hit the young disproportionately hard.

“If they can’t get jobs, they can’t pay rent, can’t form households and can’t move away from their parents’ homes,” Jacobson said.

With financing constraining activity, Jacobson said that his company — which is private but 51% institutionally owned — has been concentrating its efforts on cleaning up its balance sheets. It started 2,000 units last year and expects to start 4,000 units in 2011.

Private equity, participating debt and insurance companies are making up for some of the shortfall. The traditional multifamily lenders “aren’t back,” he said, and 90% of the bank deals involve smaller regional or local banks. “Traditional banks are not back in business yet.”

Even affordable rental housing is feeling the pressure.

“Affordable housing, which is primarily driven by the Low-Income Housing Tax credit program, is rebounding,” said Robert Greer, president of Michaels Development Company, in Marlton, N.J., which develops and manages affordable rental communities throughout the country.

“Investors are slowly coming back into the market, and deals are getting done, which is good news,” Greer said. “But the bad news is that given the depth of the current recession, more people than ever need affordable housing, and the demand far outstrips the supply.”

When his company opens a 100-unit development, he said, it can expect to receive about 800 applications.

For more information, e-mail Ann Marie Moriarty at NAHB, or call her at 800-368-5242 x8350.

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