While the multifamily market currently shows signs reminiscent of the devastating late 1980s, it looks like the industry is on track to a strong fourth quarter in 2003 and should remain steady for the foreseeable future. Although several areas have seen some of the short-term negative indicators that defined the late 1980s – an increase in vacancies, a rise in concessions, as well as stagnant rents – many states, including California, Texas, and New York, still have a major shortage of units and new development will continue.
Multifamily starts for 2002 totaled 306,300 units, a 4.6 percent increase from 2001. Developers in the Multifamily 50 list, which calculates the largest multifamily developers based on the number of units started, contributed 72,178 of the total number of units started in 2002 – 23.5 percent of the total starts.
It's no surprise that Atlanta was the nation's leader in apartment construction for 2002. However, what might be surprising is that production dropped by 8.7 percent from 2001. Only 15,000 units were permitted versus 16,237 units in 2001. Because of the volatility in Atlanta, many companies took a conservative approach here in 2002. Flournoy Construction, a third-party construction company (#16 on the list), closed just 26 units. However, some companies are still very bullish on Atlanta, with Lane Investment & Development Corp. (#21) closing 861 units. "Atlanta's broad-based, diversified economy has been a magnet for employment and population growth since the 1950s," says Marc S. Pollack, president of Lane Investment & Development. "The city has had a very predictable cyclical pattern of growth for almost a century, including the employment growth that the city experienced throughout the second half of the 1990s (i.e. 70,000-plus new jobs per year)."
Although currently there is an oversupply of new development, 2003 will see a slowdown in new permits. This slower pace will translate into a reduction of new supply in 2004, which should lead to a better supply/demand balance in 2005, Pollack adds.
On a more micro level, there are pockets of strong growth based on the lifestyle changes made over the past decade, such as the in-migration of residents back into the urban core. These pockets are continuing to thrive, particularly in the for-sale market, and should be the first areas to overcome the current supply/demand imbalance, says Pollack. "Most of our new developments are designed to fit into the projected future growth trends for Atlanta – urban infill development."
In addition to Atlanta, New York and Houston rounded off the top three cities, with 12,000 units and 10,800 units started, respectively. AvalonBay Communities Inc. is one of the few real estate investment trusts that is building in New York. The company (#13) completed 372 apartment homes in Long Island City, N.Y. "New York is one of our core markets, says Sam Fuller, executive vice president of development and construction. "We like it because of the high barriers-to-entry." The company plans to start another 361 units in New York this year and will continue to develop near centers of employment, shopping, transportation, arts, and entertainment.
In 2002, Trammell Crow Residential (#8) started 246 units and completed 549 units in Long Island, N.Y. It also started 1,769 units in Houston. The company likes Long Island because "this area of New York is severely supply constrained, and it's extremely difficult to find land to develop multifamily rentals," says Bill MacDonald, executive managing director of the Mid-Atlantic/Northeast for Trammell Crow. "In almost all cases, rezoning is required and if successful, it usually takes three to seven years and millions of dollars of pursuit costs. Demand is high and the existing stock of rental product is generally 20-plus years old."
Trammell Crow's production in Houston was the company's highest in the country, says Ken Valach, its executive managing director. It is currently pursuing three multifamily lines of business in Houston – conventional class A market rate production, bond- or tax-credit financed affordable product, and a modular apartment housing product that is intended to target renters in the 70 percent to 90 percent of area median income bracket. Of the company's 2002 starts, approximately half were class A.
Trammell Crow began working on the majority of its Houston projects in 2001 through the middle of 2002, while the Houston economy was still strong, says Valach. "Unfortunately the Houston economy weakened in the second half of 2002." Because it was one of the only strong markets in the country, capital poured into the city and thousands of units were started, just as the economy slowed. Trammell Crow's long-term outlook for Houston remains very positive. "It's a city that will continue to have solid population and job growth, which drives demand for apartments. In the short run, the apartment market will be challenging especially if we don't see a recovery in the national economy."