Greystar South regional manager Stacy Hunt is sitting in the sweet spot. Of the 92,000 apartment units his company has under fee-management, his region boasts 33,000, including 8,000 Greystar acquired for its own portfolio over the past three years. This year, Greystar will add an additional nine properties via development and will work lease-ups for Wood Partners and Trammell Crow Residential, among others. Let the naysayers complain that the crash and burn on the single-family side has yet to make an impact. Hunt says it's already here.
“Plain and simple, the subprime lending crisis has been felt,” Hunt says, comparing non-renewal and lease termination reports between fiscal years 2006 and 2007. “Between these two periods, we saw a 20 percent reduction in move-outs because of home buying. It has been big. We are about to lease up projects in Dallas, Houston, and Austin that are shooting for some very significant rents—rents that we have never seen before in Texas.”
With little variation, multifamily executives like Hunt are enjoying the good life, and pointing to the housing market—particularly continued fallout from the single-family subprime crisis and corresponding credit crunch—as the No. 1 catalyst to industry growth.
The MFE 2008 Strategies Survey, an exclusive online poll covering 20 hot button issues that was conducted for this special feature (see “About the Survey,” above), backs those ruminations. More than any other factor, the housing market was identified by 75 percent of respondents as one of the biggest trends shaping the industry over the next 12 months. And in contrast to the gloom and doom that the single-family housing market seems destined to face in 2008, the impact on multifamily should continue to be all good.
HOT MARKETS How good? Consider that all of the sudden, Detroit is a decent apartment market again. Surprisingly, Motor City operators report that fundamentals there—particularly in downtown—are quite solid. “Our holdings are not in any markets that are at risk,” says Josh Kornberg, head of investments for Lakewood, N.J.-based The Lightstone Group, an owner and manager of 92 apartment communities in Michigan, Indiana, New England, and the Southeast. “That includes holdings in Detroit. Fundamentals there are sound and we're holding enough assets to get the economies of scale.”
Even for single property operators, the turnaround is noticeable. “We're not planning on growing our footprint there anytime soon,” says Jennifer Stull-Wise, vice president and residential asset manager for Ram Realty Services, a Palm Beach Gardens, Fla.-based multifamily owner and manager that is holding onto Riverfront, a legacy property in Detroit that includes one condo and two apartment towers. “But as much as Detroit is seeing more woes than the rest of the country, it is still relatively healthy from a rental standpoint, especially [in] the inner city.”
When it comes to geography du jour for multifamily, however, you are more likely to see operators continue to leverage the “U” or “smile” footprint that targets markets on both coasts, across the south, and in larger Midwest metros such as Chicago that are juiced with positive job growth. “We are redeploying our construction and development assets from the high-rise condo business into high-rise apartments in Chicago, D.C., Phoenix, Vegas, Southern California, Northern California, and, if possible, Florida,” details Rick Cavenaugh, president of Chicago-based Fifield Cos.
Cavenaugh thinks major multifamily players will continue to surrender development in smaller, mid-tier markets to local and regional firms, but he nonetheless expects 2008 to be a year of cutthroat competition in the multifamily arena. “There is not an endless supply of deals and sites, and there is still a tremendous amount of intricacy in making a transaction happen,” he says.
GOLD STANDARDS With such a limited amount of workable dirt, most in the industry expect to continue targeting niche product and customers. But that strategy itself may become a commodity as a rash of firms attempt to lure the active adult and boomer set with ultra-luxury properties and amenities. “It has to be Class A-plus; that is your target market right now,” Cavenaugh explains. “And you even have to differentiate that from Class A. Hanover and Trammell Crow and BRE have ratcheted up what they are offering to people and have raised the bar so high that it's no longer A, B, or C; it is A-plus, A, B-plus, and so on.” In fact, more than half (54 percent) of the respondents to the 2008 Strategies Survey report a propensity toward market-rate apartments, and among that set, the majority are leaning towards the higher end of the product spectrum, with 34 percent indicating a likelihood to pursue Class A properties (see Figure 2, below). Particularly among those firms that will roll the dice on the condo market—a surprising 41 percent of survey respondents—luxury is where deals are most likely to pencil out. In Minneapolis, urban infill specialists Hunt Associates will move forward with several condo projects in 2008, company president Dan Hunt says. “But they are high-end sites, and we tell our salespeople to have no fear of being aggressive,” Hunt explains. “People looking today are serious buyers—they just want a good deal.”
DEMOGRAPHIC DARLINGS That's not to say that everyone is going after the most tonied tenants. For many regional and non-REIT operators, getting solid B product in high job growth markets is a lucrative proposition, especially as the big boys duke it out for top dollar. “There is too much competition in the luxury core markets,” explains Matt Papunen, managing principal at Alterra Capital Group, a Miami-based multifamily real estate investment firm. “Our game plan now is buying strictly workforce housing, strictly B class. That's the market we love, so what is most important to us is job growth. In that regard, Houston and Dallas are very strong markets, and they are still highly under priced, in our opinion.” In fact, workforce housing is beginning to gain in popularity among the market-rate set. When identifying the customer demographics they will target next year, respondents to the 2008 Strategies Survey cited workforce residents as often as the luxury clients—both segments claimed popularity among 38 percent of respondents. “The rents that you get in Florida for workforce housing are not that far below the rents you would get for traditional market-rate apartment stock,” Stull-Wise says. “That gap is not as wide as everyone thinks it is.”