By the time you read this, the likelihood that San Antonio–based Lynd Co. will have completed the disposition of EnV, its $73 million, 29-story, 239-unit downtown Chicago apartment tower, will be 99 percent certain. “We’re under contract and think the deal will be completed by the end of the year,” Lynd president and COO A. David Lynd told Multifamily Executive in December 2011. That market pundits expect EnV to sell for around $125 million and net the firm a sizable return is beside the point. According to Lynd, the question of whether renters over the next decade would support the Class A, urban, luxury core product was the more pressing issue.
It’s an irony that’s not lost on Lynd and other dealmakers and designers in the multifamily asset development space: Even as waves of investors continue to show a preference for core assets tailoring to young urban professionals, market watchers are beginning to question the ongoing ability of consumers to afford the top-tier rents those assets command. According to Axiometrics, approximately 54 percent of Gen Yers are currently living in the suburbs, with only 32 percent electing to live in city metros, and another 14 percent living in rural areas. “That challenges this idea that we should just build Class A, urban-style apartment properties that will appeal to the Echo Boomers,” says Axiometrics president Ron Johnsey. “The problem is further compounded by the fact that the median portion of the Gen Y demographic earns about $26,000 a year in income.”
The result is a changing delta in achievable rents and corresponding development costs. As an example, Johnsey points to the Washington, D.C., metro, where development costs average approximately $220,000 per door in inner-ring suburbs such as Tysons Corner, Va., but balloon to more than $300,000 per door in downtown D.C. “The cost difference and corresponding rent levels needed to achieve ROI are almost 45 percent more expensive,” Johnsey says. “So the idea that this urban lifestyle is going to take over, I just don’t think it is going to happen.”
Considering that the average urban, city center rents in the top markets have risen 4.65 percent since September 2010 (with rent growths more than 10 percent in trendy young markets like Seattle and San Jose, Calif.), rental growth trajectory seems to indicate that the industry may eventually price itself out of its target resident’s reach. In which case, with homeownership reaching historic affordability levels, industry observers suspect that a migration to home, or even condo, buying may come sooner than we think.
Smart developers, and buyers, are thus turning to secondary markets and more adaptable product types as they seek to appeal to post-recession households. In Philadelphia, boutique apartment rehab and development firm Post Brothers is building a business by catering to a broader range of renters who are content to live on the city fringe at suburban prices.
“We’re not people’s first apartments out of college,” says Post’s Pestronk. “We’re really focused on 25- to 35-year-olds who are renters by choice. We’re not focused on Echo Boomers; we are focused on current supply and demand and the market as it stands today: Where are the rents, and what is the product?”
Lynd couldn’t agree more. “That’s the question we were facing with EnV,” he says, noting that while rental market fundamentals look bullish over the next six to seven years, those fundamentals, including the propensity of consumers to buy versus rent, are in a market-to-market condition of flux. “They’re already building condos again in Florida, and when you think about that, it is pretty amazing considering the oversupply that existed there just a few years ago. EnV was one of the successful high-rises to come out of the recession, and I think it will go great as a rental, but if I am building any kind of high-rise now, I’m building it to condo specs with the expectation of a conversion exit somewhere down the line.”
That secret is probably already out among single-family home builders. In December, luxury home builder Horsham, Pa.–based Toll Brothers announced that it had teamed up with New York City–based apartment REIT Equity Residential to build a $134 million, 40-story tower in Manhattan with a yet-to-be-determined mix of apartments and condos.
Sounds like a litmus test of sorts to us.