Multifamily Market Trends

The past week has been spent pouring over data from Harvard's Joint Center for Housing Studies, NMHC, PPR, US Census Bureau, NCREIF and many others. With the housing market in a state of chaos I was hoping to find more detailed market data that indicates where the rental market might be headed. Here are some of the notable statistics:

* Only rental markets and remodeling activity expanded in 2006. Improvement spending set a record for the 5th consecutive year. (State of the Nation's Housing 2007)

*Demand for affordable rental housing is not being met; 200,000 units are being removed from the rental stock annually (State of the Nation's Housing 2007). When you combine this stat with the fact that the median age of the country's rental stock is 37 (US Census) supply numbers look rather healthy.

* Strong property valuations have continued to encourage property owners to reinvest in properties. At last check Harvard's JCHS put this spending level number at $50 billion+ for rentals alone. Investment grade apartment prices increased 8.4% year over year in Q1 2007 according to NCREIF.

* Household growth is expected to accelerate to 14.6MM from 2005 to 2015 due to immigration, echo boomers entering the pool and the extended longevity of the baby boomers (State of the Nation's Housing 2007). Most anticipate that rentals will benefit most from this trend going forward.

There is no clear indicator that multifamily rental starts will replace the activity in the condo market this year but anecdotally the major players all seem rather bullish on where things are headed. Here are some quotes from the May Issue of MFE that are much more telling than the macro views and demographic analyses.

Campo on demand:
Just look at these numbers: At the peak of the for-sale boom in the beginning of '05, about 24 percent of Camden Property Trust's residents moved out to purchase homes. But in the last quarter of '06, only 19 percent left to buy a home. “That's a big drop,” says Ric Campo, chairman and CEO of Houston-based Camden. “We have 70,000 units roughly, so that's 3,500 fewer leases that we have to replace annually.”

Tuomi on land costs:
“Land is much more competitive now for apartment developers, whereas a few years ago it was out of sight,” says Fred Tuomi, executive vice president and president of property management for Chicago-based Equity Residential. “We would bid a certain price, and a condo or for-sale user for that land could bid double or sometimes up to the three times as much. At least we now have an opportunity to compete acquire these sites, whereas the last 24 months a lot of sites just weren't even possible.”

Linneman on opportunity:
“In early 2006, the opportunity was to sell your land that you bought six months earlier at a big profit to someone who was going to be a big condo developer or to sell your apartments at a 3 [percent] cap [rate] to some-who was going to be a converter,” says Peter Linneman, Albert Sussman professor of real estate at the University of Pennsylvania's Wharton School. “The opportunity in late '07 is going to be buying back your apartments from the failed conversion or buying back your land because the guy never got the deal off the ground, and you'll buy it back at a discount to what you sold it at.”

Leupold on the shadow market:
“Condo reversions is a topic on most investors' minds, but we believe the issue has been over-hyped,” says Craig Leupold, principal of Green Street Advisors, a Newport Beach, Calif.-based consulting and research firm. “There may be pockets of weakness in certain submarkets that experience a large number of reversions, but overall we expect reversions to have little impact on the U.S. apartment market.”

The bottom line: it is easy to get caught up in national statistics that mask dangers or opportunities in specific markets. I attended the Builder 100 conference several weeks back and was amazed at how optimistic many of the speakers were about their business in light of such negative headlines. The speakers that were most bullish had a specific strategy to take advantage of the changing dynamics in their market.

Here is how some of multifamily's strongest firms handle the uncertainty:

Harrelson's Strategy:
To compensate for pricing pressure and cap rate compression, Pinnacle increased ownership in the affordable and military housing areas. Harrelson says his company amassed nearly 20,000 units of military housing and increased its low-income and tax-credit portfolios as well.

Ward's Strategy?
“The baby and echo-boomers are really going to be driving multifamily in general,” Alliance Residential President Bruce Ward predicts. “What seems to be happening is that both demographics are looking to be in more high-density urban housing.”

Micheals Strategy:
Michaels Development of Marlton, N.J., also moved up on the list through a strategy of capitalizing on niche markets such as military and affordable housing. “We find that the demand for affordable, workforce housing is just incredible and getting bigger and bigger every year,” says Michaels Development President Bob Greer, who credits that demand for the company's surge in management business.

The case studies are much more interesting than the stats. Check out the May Issue for more.