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Apartment Builders Battle High Construction Costs
Leaders in the multifamily housing industry attending last month’s Multifamily Trends conference in San Francisco voiced confidence that the demand for apartments is strong today and will remain so for the foreseeable future, but they also said that construction costs have become problematic and that the condominium boom is clearly winding down, with negative implications for some companies.
The conference was presented in partnership with the Urban Land Institute and PCBC.
Greg Vilkin, president of Forest City Development, said that he has seen construction costs rise 30% to 40% in the last 12 to 18 months, which is pricing out both rental and for-sale business. “We are only initiating deals already in the pipeline and where we have land,” he said.
High overhead is increasing the number of projects that don’t pencil out financially, Vilkin said, and that is helping to keep the marketplace from being overbuilt, so there is hope for moderation in costs. With more high-rise work than they can handle, contractors are looking at 35% to 40% profit margins, he said, but when the work goes away there is a chance for those margins to come down.
“Logically, people can’t live in a $900-a-square-foot apartment even if they would love to,” he said. “And people can’t afford to pay 60% to 80% of their income on housing.”
As a result, condominiums have now lost favor with investors, Vilkin said, and the market is returning to more normal levels of activity. For 30 years, a sales pace of four to five units a week was considered good, he said. In more recent times, there have been projects where 100 units were sold in a day. “It has never been seen before,” he said, “and it will never be seen again.”
Disasters in the Condo Market
Condo sales are slowing measurably, in some areas more than others, said Leonard Wood, director of Wood Partners, LLC and chairman of the NAHB Multifamily Leadership Board, because “the buyer feels the pressure is off. They don’t have to buy it today because it will cost 20% more next year.”
Although they have moderated, the condo markets are still healthy in both Atlanta and Orlando, Fla., Wood said, but it’s a different story in South Florida, one of the places where investors were most active. And banks in general are taking a harder look at condominiums, he said, and are getting much tougher on luxury buildings.
“There will be disasters” in the condo market, said Bobby Turner, managing director of the Canyon-Johnson Urban Fund. On his watch list are projects that have pre-sold 75% to 80% of their inventory but then haven’t been able to keep their construction costs under control. Some of these “will fail,” he predicted.
A more viable option for multifamily developers is to “focus on communities that don’t have product,” Turner said. “Go into Little Havana and fulfill the existing need that hasn’t been met. Provide affordable workforce housing and joint venture with Cuban developers from the community. The community knows what it wants.”
Solving Workforce Housing Needs
Turner said that public-private partnerships are essential to solving workforce housing needs in such expensive housing markets as Los Angeles, where less than 10% of the police force can afford to live in the county. Land is the most expensive barrier to affordably priced housing, he said, so bonus densities from the cities are a starting point.
Rezoning industrial land for multifamily development is another approach that is working, panelists noted.
Localities also need to be reminded of what can result from short-sighted housing policies. “Jobs will leave if there is no place for workers to live,” said Vilkin. For example, Albuquerque is starting to look like a good location for making movies; its median home price is only $114,000, compared to $580,000 in Southern California and it’s only an hour-and-a-half flying time from Los Angeles.
Vilkin said that over the next 30 years, he expects the population of Albuquerque to grow from 700,000 to 3 million and for the West to grow by 40 million.
In general, multifamily renters and owners will see some measure of affordability restored through higher density development and smaller units, and that’s something that growing numbers of households want as they look for alternatives to single-family housing, according to Connie Moore, president and CEO of BRE Properties.
The struggle with land costs and density will only have escalated by the start of the next decade, Moore predicted, raising interesting possibilities for replacement of some of the older existing housing stock.
 The Multifamily Forecast: Major Shifts Underway
Find out where the mulifamily market is headed in HousingEconomics.com’s “Multifamily Forecast Report.” (Sample report).
The forcecast, available by subscription only, provides the latest information on the condo boom, tax credit/subsidized units, market rentals and more. Data and figures are provided in downloadable Excel tables. Reports are in a PDF format.
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