A very wise friend once told me that he often struggles with the decision to spend millions to proceed with developing a new apartment community. He says he has to convince himself that he is a genius for finding an opportunity that others did not take see. The fact of the matter is that it is often years before he knows whether he was the genius he thought he was or a fool for thinking he was smarter than everyone else was. He knows that he would never develop another community unless he is optimistic about the future. I share his optimism. We?re at the forefront of a decade-long boom in the apartment business. Here are the three reasons why you should share our optimism as well.
The echo boom, which started in the 1980s and peaked in the early 1990s, now includes as many as 80 million young Americans, according to demographic experts. This generation will want cool, stylish, high-density housing located primarily in the urban core and faux-urban suburbs. These echo boomers, who are just beginning to graduate from college, like dense environments with lots of entertainment options. They are team-oriented, date in groups, and demand a sense of community. We will need to rethink our floor plans, unit mix, and amenities to meet their desires for interaction and fun common areas.
The baby boomers, a generation that also numbers about 80 million people, are another important group for multifamily firms. But beware: They are used to getting their way!
A little narcissistic, boomers are focused on staying young. As they say, "Fifty is the new 30!" They strive to be "hip and happening" in their lifestyle choice and will drive demand for distinctive high-density housing. Don't be surprised when boomers sell their suburban "McMansion" and buy a newly developed urban "McLoft" that looks old but, thanks to its new construction, doesn't have the hassle of old, drafty windows. They also demand a high level of concierge services and amenities.
Immigrants represent the third group supporting multifamily demand. We live in the finest country in the world, and everyone in the world–even the French–would love to live here. Just look at the waves of immigrants in cities around the country. The American dream lives in the hearts and souls of these newcomers who will become American citizens. As immigrants and Americans, they will drive the demand for good quality, affordable apartment homes in cities like Raleigh, Dallas, Chicago, Los Angeles, and elsewhere. The challenge will be providing quality, affordable rental housing at a time of rapidly increasing construction cost.
I know we have always found a way to build more apartments than needed in past cycles, but I believe our greatest challenge today may be providing enough multifamily housing to meet the enormous demand from echo boomers, baby boomers, and immigrants. Zoned land with utilities is a scarce thing in good markets, and utilities and roads are getting harder and more expensive to build. Neighborhoods have become organized against development. As anyone who's tried to develop an apartment project recently knows, we've gone from fighting NIMBYs ("Not in My Back Yard") to BANANAs ("Build Absolutely Nothing Near Anything"). It's an untenable situation, especially given the housing needs and desires of echo boomers, immigrants, and baby boomers.
If you are lucky enough to find a zoned site, then you face another question: Who will develop it for you? During the 1990s, many talented, entrepreneurial young men and women went into the "dot.com" world rather than real estate, and now we have a shortage of experienced developers. Our challenge is to find those experienced entrepreneurs and recruit them to our industry, or hire the next crop of talented real estate MBAs and train them to be developers.
The good news is that right now, capital loves real estate. We are finally an accepted asset class. In fact, we are a required asset class! With apartment REITs now included in every major index, pension funds and insurance companies must own real estate. But these major players do have a choice: They can buy REIT stocks or they can make direct investments. I believe that REITs will capture the majority of these investment dollars due to the liquidity and transparency they provide, but the amount of capital flowing toward real estate is so large that direct investments will also grow tremendously.
Aging baby boomers will also provide another source of capital. The dividends and cash flow that apartment REITs deliver is now cool–investing is now more about preserving wealth than racking up capital gains. In this environment, real estate offers a safe haven for boomers' retirement dollars. There has never been more information available about real estate investments than there is today, and that type of transparency reduces risk. Reduced risk lowers the required equity returns on a deal. Lower equity returns drive lower cap rates. Therefore, capital loves real estate and accepts a lower return due to the lower perceived risk of real estate against other investments.
Given all these factors, I cannot help but be an optimist. I believe we're at the beginning of a decade-long boom for multifamily real estate. Don't be afraid to take advantage of these opportunities. Big chances like this don't come around very often.