Yesterday, Kaid Benfield posted a great stat-filled blog entry on housing forecasts, which lines up with the “perfect storm for rental” storyline I heard at CNU20 last week. I chatted up developers who confirmed the story, but added one REALLY worrisome trend (scroll down to #7 for the punchline).
The perfect storm, summed up, is:
- Not much stock – the building boom pre-2007 focused on single family units.
- It’s old stock - Renters have the luxury of seeking out new. One developer’s observation is that older stock is less wired and gadget people need outlets. Lots of them.
- Demographics - As reinforced by data, the Boomer + Millennial cohorts are large, like urban living, and see renting as an advantage at this stage in their lives. Again, I will turn you to another one of Kaid’s posts on evolving markets, which is filled with other great references.
- Don't want to commit to a house –Renting lets people take a trial run at a region, neighborhood, or even a building. This is key for the quiet-loving, suburban empty nesters who are moving to more urban areas.
- Rents going up – This has caught the eye of investors.
- Costs are low – One developer said contractors in his region are doing work at cost or slightly higher (though this can’t last much longer).
- Can't get financing for anything else –For any other product, banks are requiring demonstration of up to a 70% commitment for inking a finance deal, such as pre-sales for condos and signed retail/office tenants. You can’t require this kind of commitment from apartments because people don’t really go apartment shopping until a month or so before move-in.
On the one hand, multi-family dwelling enthusiasts see this as sweet irony. Apartment housing seemed to be the forgotten stepchild of the building boom, despite its important role in better housing/transportation/economic patterns. The fact that financing is finally meeting demand just feels good. On the other hand:
- The storm is dying down as rents are increasing to tip the “rent versus buying-a-house”balance.
- There is no guarantee that the apartments being financed are in the "right" place. A Walkscore analysis would be fun.
- Question: Is Wall Street being driven by fundamentals, or has the pendulum for up-front commitment swung SO far that money is chasing the one product that can justify not having commitments?
- One developer had to disassemble his vertically mixed use site plan and plant an apartment building at the high traffic corner just to get started. Whether this will dilute the smart growth performance of the site plan is a question. However, most of us in planning know that in walkable communities, increasing distance and separating uses by even a small amount makes a big difference.
- We still need to solve the HUD/Fannie/Freddie restrictions on commercial components for mixed use. One developer purposely designed a first floor to LOOK like units in order to get financing, but which could be converted later. The Fannie Mae caps draw the most ire, and are particularly painful here in the land of three-story smart growth. The taller your apartment building, the less these numbers have to matter, since the residential component on upper floors dilutes out the commercial contribution of dollars and floor area. But, important new buildings like this one in Sarasota have the roughest time.
- See this CNU website for more on this chart.
This brings us to the billion-dollar question: once the apartment construction markets are saturated - what's next? Batten down the hatches.
@CNU20, @Kaid, @CNU