When J. Ronald Terwilliger, Trammell Crow Residential's national managing partner, surveys the apartment landscape, he sees something that doesn't quite fit. The multifamily industry continues to flood the market with luxury product that is not being filled.
But the biggest growth opportunity over the next decade may be among several new groups of renters that are just under the radar – and they won't be able to afford these high-end apartments.
Take a quick glance at the latest study from the Joint Center for Housing Studies at Harvard University, and it doesn't take long to discover where Terwilliger is coming from.
Minorities and echo boomers will constitute the fastest growing group of renters. The biggest increase will be among Hispanics, who will grow by 1.5 million renters between 2000 and 2010. The under 25-year-old renting demographic will increase by more than 750,000 during this same time period.
The trend toward luxury apartments isn't completely misguided, of course. Demand for class A apartments is likely to increase in years ahead, though maybe not by enough to fuel current rates of construction. Renters in the 55-year-old to 64-year-old age group, the wealthiest cohort, will jump by more than 850,000 by 2010.
Even so, the growth of populations looking for more affordable housing could eventually cause a shift in multifamily building patterns, according to Terwilliger. "In the late '90s there were a lot of wealthy single people who wanted to live an increasingly urban lifestyle and would pay $1.50 to $2.50 per square foot per month," he says. "But if you look at the demographics, it appears the majority of new renters would be minorities. I think what we have to do as an industry is shift and build more product that is affordable."
While Terwilliger knows what needs to happen, many other multifamily owners and developers aren't sure how to respond to the next generation of renters. Time after time, developers insist that skyrocketing land costs force them to build class A units. But with occupancy levels still suffering and concessions still ranging from two to three months free rent, it's time to think about what's going to sell and what renters need.
The challenge for developers becomes how to create more affordable units even with rising land and construction costs. Developers who meet these needs will be the one's best equipped to provide solutions to service immigrants, echo boomers, minorities, and lower-income baby boomers.