The message at today’s multifamily industry press conference at the International Builders Show in Orlando, Fla., is that demand is back for apartments, but supply does appear to be catching up anytime soon. And, with the nation having up to 2 million fewer households than it should given the population, that will create the need for even more apartments in the next couple of years.
“In 2010, we didn’t produce enough rental housing to make up for what we lost through obsolescence and disaster and just misuse that created unuseful properties,” said NAHB Chief Economist David Crowe. “We’ve got to get back on track. We still have a growing population.”
Crowe did say things would improve slightly in 2011, with starts rising 16 percent to about 133,000. But after sitting at historical lows of 114,000 in 2009 and 2010 when the NAHB says 250,000 is necessary to keep supply and demand in balance, that’s not a lot of improvement.
“We should see a much more vibrant increase in 2012 as the economy really begins to move forward and the momentum of new jobs really produces more household formations. So, in 2012, I’m expecting about 200,000 starts which would be a 50 percent increase over what I expected in 2011.”
The good news is that starts perked up in the third quarter of the year, but fell off in the fourth quarter. “The signs are still there, and that’s the reason I’m positive about 2011,” Crowe says.
While many developers didn’t put shovels in the ground in 2011, the IBS press conference did feature three who are active: Bill McLaughlin, an executive vice president at Arlington, Va.-based AvalonBay Communities; Jay Jacobson, national partner for acquisition and investment at Atlanta-based Wood Partners; and Robert Greer, president of Michaels Development Co., based in Marlton, N.J. Between the public markets, strong institutional partners, and access to Low Income Housing Tax Credits (LIHTC), these firms have been putting shovel to dirt.
Despite their development activity, there are concerns. AvalonBay has a finely tuned high-barrier markets strategy, but McLaughlin worries that the lack of new supply could push jobs out the markets that AVB has worked hard to gain a foothold in, which also happened in the early ’90s. “People couldn’t afford the rents and moved out of the knowledge-based markets,” he said.
Jacobson, meanwhile, is already seeing the demand that Crowe projected. “I’ve never seen pent-up demand and stabilization in the apartment market,” he said. “Everyone is showing increased occupancies.”
In fact, Jacobson says that Wood’s lease-ups are filling at a faster pace than Wood had pro-formaed. That kind of success hasn’t pulled in the large, national banks, but Jacobson is seeing local and regional banks trickle back into the contraction markets. In fact, he says they comprise about 90 percent of that market right now. Even insurance companies, typically the more conservative lenders, are coming back in “a major way.” And other groups are showing interest as well. “We’re seeing private equity come in and do debt in equity in one term,” he says.
Greer, like many affordable developers, has seen financial challenges that have made it difficult for him to build sorely needed affordable housing. Many of the LIHTC investors vanished during the recession and the market is only now recovering. To get deals to pencil out, Greer’s company began syndicating its own credits and started its own construction company to save in building costs. Still, he says a lot more needs to be done. “The population is growing much faster than the developer community can satisfy,” Greer says.