The strength of the economy has supported household formation.
By Richard Berger | August 23, 2023
Multifamily developer confidence heading into Q3 and Q4 of 2023 remains upbeat, even though the market is experiencing a highly competitive landscape and higher-than-expected costs in land, labor, and construction materials.
Many also see strength continuing into next year – in both value-add or new construction.
“Because the assets continue to provide a strong NOI, there is room for planned CapEx spending and continued development opportunities,” Ira Singer, Founding Partner at Mosaic Construction, tells GlobeSt.com.
Singer said there are proven development, value-add, and adaptive reuse strategies being implemented in major and mid-major markets that continue to add housing, resulting in continued growth in the construction sector for the foreseeable future.
“Projects that continue to show no signs of slowing down are focused on reducing utility/operational costs, which includes window and door replacements and smart lighting and plumbing fixtures retrofits.
“The overall sector is focused on providing a residential ‘experience’ while building a community. There are opportunities to enhance the physical spaces by creating larger and more secure package rooms and mailbox centers, building out pet-friendly spaces and amenities as well as upgrading community areas for work and play.
Land prices and hard costs rose from mid-2020 through early 2023 while interest rates fell, according to David Fletcher, Excelsa Properties Managing Director and Head of Acquisitions.
He tells GlobeSt.com that today, hard costs have stabilized, and interest rates have risen. However, land prices remain elevated.
“Returns on cost do not support developing, in the context of higher projected exit cap rates, trended rents, insurance expenses and real estate taxes,” Fletcher said. “Importantly, buying is cheaper than building.”
Demand ‘Surprised to the Upside’
Brad Case, PhD, CFA, CAIA, Chief Economist & Director of Research for Middleburg Communities, tells GlobeSt.com that rental housing demand has surprised to the upside for two reasons.
“One, the strength of the economy has supported household formation—that is, young people are willing to move out of their parents’ basements and sign leases for their own apartments because they have confidence that they’ll keep their job and their income,” Case said.
“Second, mortgage rates averaging more than 7% have made homebuying less appealing than ever, especially given the possibility that record-high house prices may retract. Combine that stronger-than-expected demand with the supply difficulties, and it’s easy to see why those developers who can still make a project work are more optimistic than ever about its future.”
Ryan Shear, Managing Partner at PMG, tells GlobeSt.com that this year has presented multiple opportunities for growth across the nation’s most desirable downtown cores.
“PMG’s national multifamily portfolio Society Living has experienced properties securing financing, reaching significant construction milestones, and garnering widespread interest from their communities,” Shear said. “With the limited availability of single-family residences for sale across the country, the continued migration of professionals into growing metropolitan centers, and elevated interest rates incentivizing renting, the multifamily market is currently hitting its stride and should remain steady heading into 2024.”
Doug Ressler, Yardi Matrix, tells GlobeSt.com the multifamily market exhibited strength in July, as the economy continues to outperform expectations.
The average U.S. asking rent rose $2 to $1,729, while year-over-year growth fell to 1.6%, down 30 basis points from June.
Supply growth has emerged as the key factor in metro-level rent growth. Of the 12 metros in Matrix’s top 30 list with supply growth of 2.5% or more year-over-year, six recorded negative rent growth this month. Austin (4.4% increase in total stock year-over-year through July), Nashville (4.1%), and Raleigh (3.5%) led in supply growth.
Homeowners, Others Won’t Budge
Paul Rahimian, CEO and founder of Parkview Financial, tells GlobeSt.com there is renewed optimism about multifamily because “the reality is, there’s a housing shortfall in most MSAs.”
As mortgage rates have gone up (exceeding 7% this week), the ability of home buyers to be able to buy a home has diminished.
“Further, homeowners that locked in low fixed rates are not likely to sell their homes as they won’t be able to replace the low mortgage rates of the past few years,” Rahimian said.
“This has caused a slowdown of existing home transactions and will create more pressure and demand for apartments. Despite rising financing costs, the decline in construction costs and the demand for multifamily product will continue to create opportunities for developers to build apartments for many years to come.”
Many ‘Forced’ to Rent
Joseph Rubin, Senior Advisor at EisnerAmper, tells GlobeSt.com that multifamily is experiencing strong tailwinds that will sustain demand. “High interest rates are forcing households to rent, and it is not likely residential mortgage rates will fall,” Rubin said. “If long rates stay at their historical norms, mortgage rates above 6% could be a reality for several years.
“Additionally, tenant credit issues created by the pandemic are abating. Collections have improved and, in many states, landlords can now enforce their leases. Despite potential pockets of temporary oversupply in certain markets, we expect multifamily demand to continue to be strong over the next few years, which supports continued new development.”
Masoud Shojaee, CEO and Chairman of the Board at Shoma Group, tells GlobeSt.com, “An increase in confidence among multifamily housing developers is a welcome indicator of growth within the real estate industry. “More developers reporting favorable conditions should spur an uptick in new projects and boost the housing market,” Shojaee said.
South Florida, for example, is being driven by migration patterns across the state, the demand for multifamily housing in urban areas is continuously high, he said.
“However, while we remain hopeful about the market and the 2023-2024 season, market fluctuations and economic uncertainties could become roadblocks to this positive momentum,” according to Shojaee.
Some are finding new ways to finance projects.
New Methods for Funding Projects
David McCullough, ASLA, PLA, Principal Landscape Architect at McCullough Landscape Architecture, tells GlobeSt.com that new development models have recently emerged that are allowing many to see new opportunities. One example is student housing grant money that is provided by the State for developments on community college campuses across California. In addition, local agencies are providing land for housing under the State of California Surplus Lands Act.
“Many new incentives are being provided by local governments for developers that are interested in developing affordable, transit-oriented, ecofriendly (“complete”) housing solutions,” he said. “These incentives are helping the cost of construction look much more reasonable than in the past.”