Few in multifamily need a reminder about what a golden age much of the past decade has been for the industry.
Powered by steady job growth, the increased difficulty of getting a home mortgage, a relative dearth of new apartment construction, and perhaps even a decreased interest in buying a home on the part of millennials, the multifamily industry has soared. Vacancy rates plunged to microscopic levels while rents saw robust growth.
Inevitably, new construction began to increase. According to RealPage, apartment completions in the 150 largest U.S. metros reached a 30-year high in 2017, with 364,713 units finished. That number represents a 30% increase from the year before and a doubling of the historical average.
Now, with the sector showing some ever-so-slight signs of softening, new development appears poised for a bit of a cooling. RealPage projects that 330,000 apartment homes will be delivered this year. Furthermore, apartment construction volume dropped from 478,000 units in early 2017 to 382,000 units by the end of the year, which indicates deliveries have peaked for the current cycle, according to the company.
However, not all apartment markets are created equal, and while construction may be headed for a dip on a national basis, many developers are confident about continuing to assemble robust development pipelines.
The Bainbridge Cos., headquartered in Wellington, Fla., is one of those developers, as is Charlotte, N.C.–based LMC.
“We’ve averaged a little over 6,000 starts for the last couple of years, and I’d say our goal would be to maintain that pace,” says Ed Easley, president of LMC Development. "Whether it's slightly less or slightly more, that will just be determined by where the opportunities are.”
For companies like Bainbridge, No. 16 on the 2018 NMHC 50 Top Developers list, and LMC, No. 7 on the list, the coming years won’t be a time to pull back, but an opportunity to further expand their development portfolios.
Growing in the East
Bainbridge was founded in South Florida in 1997 and initially focused on developments solely in the state. Over time, the company, which also acquires apartment communities and manages more than 20,000 units in the eastern U.S. (about half of which are fee managed), began to spread its development focus along the East Coast, including across all major markets in Florida, the Mid-Atlantic, and the Carolinas.
According to Tom Keady, Bainbridge’s president of development, the company’s development pipeline is increasing. Bainbridge has approximately 3,000 units currently under construction and forecasts it will have an additional 3,500 under construction a year from now.
The reason for Bainbridge’s confidence stems from the company’s careful consideration of the dynamics in its target markets. The firm concluded those areas are well-positioned to absorb new supply because of factors like high-quality job growth, strong overall local economies, and increasing household formation, according to Keady.
The company’s current development pipeline includes communities in the Washington, D.C./Baltimore metro; Raleigh and Charlotte, N.C.; Atlanta; Jacksonville, Tampa, and Orlando, Fla.; and South Florida markets. Bainbridge also opened a regional office in Atlanta to pave the way for third-party management assignments, acquisitions, and development opportunities in that metro. The company’s overall development pipeline includes mid-rise urban communities and traditional garden-style suburban properties.
Before pursuing development in a given market, Bainbridge likes to establish its presence in the area through other activities, Keady notes. “We typically do acquisitions and management in each market before we start on development,” he says. “That gives us really good market knowledge and experience before we do ground-up development.”
While Bainbridge’s pipeline is growing, Keady expects apartment development as a whole to moderate somewhat in the near future.
Not Slowing Down
Like Bainbridge, LMC is viewing the next couple of years as one of great opportunity for new development. LMC develops in the West, Southwest, Southeast, Midwest, Mid-Atlantic, and Northeast.
“We have nine divisional offices across the country, and we’re currently expanding in all of those geographic areas. Obviously, they all have different dynamics that might affect our underwriting, but we’re generally very enthusiastic about the multifamily business,” Easley says. “We remain focused on the top 25 markets in the country, and we don’t have any of them redlined.”
According to Easley, LMC is pursuing all three major product types: urban high- and mid-rises, as well as lower-density suburban communities. “We’re bullish on all three,” he says. “With our suburban projects, we’ve been really focused on making sure those locations have transit, barriers to entry, or an employment story that positions them for success.
“We’ve done suburban deals in geographically diverse markets: Denver, Texas, Chicago, the Southeast, and the Bay Area,” Easley adds.
Like many in the industry, Easley also sees an overall cooling of the pace of new apartment development.
“This has been an unprecedented run in the multifamily business, and it feels like starts are going to take a little bit of a breather overall in 2019 and 2020,” he says. “We think that’s a great sign. I believe that’s going to help the overall performance of our industry, and we’re going to really try to maintain our velocity of new starts to capitalize on the fact there’s going to be a little bit of a slowdown in delivery coming over the next couple of years.”
Part of the relative slowdown will stem from the increased caution exhibited by lenders, according to Easley.
“Construction lenders in general are being very careful,” he says. “They’re underwriting the sponsorship very tightly.”
Keady echoes those sentiments. “In some markets, development will decrease,” he says. “We think a lot of that has to do with the availability of financing and the fact that you have to be an experienced, seasoned developer and operator in order to get projects out of the ground, and it’s becoming increasingly more difficult in some markets to do that.”
Increased Development Costs
Rising construction material, land, and labor costs are another factor that could at least somewhat slowdown new apartment development in the near future. Bainbridge is positioned to blunt some of the impact of those rising expenses because of its in-house construction division, Keady says.
“We build about 80% of our projects with our own in-house construction company because we can more tightly manage the process prior to and during construction [that way],”he says. “We’re better suited to mitigate the cost increases over time.”
Similarly, LMC benefits from its parent company, which builds single-family homes in more than 20 states. “We have real scale and purchasing power between our home building company and our multifamily company,” Easley says. “We also try to form strategic partnerships with selected subcontractors and suppliers to further capitalize on bulk pricing, as well as work with our parent company to explore innovative and cost-saving design and construction techniques.”
No Time to Quit
When the apartment sector turned white-hot, it was inevitable that new construction would pick up. It did, and 2017 proved to be a historic year for apartment completions. Now, overall new development is set to moderate at least somewhat.
But established developers like Bainbridge and LMC see the coming months and years as great opportunities for development growth.