What's in the cards for apartments?

  • By Wendy Broffman
  • Published February 2017

Frank, but adds there could be a rollback on loan generation with the new administration.

"Investors see this as an opportunity to find a position in the middle of the capital stack, between 60 and 80 percent loan-to-value leverage, that would provide opportunity in case banks have to pull back a little," he said.

"That was one of our 'best bets' from our 2017 report," Warren added, referring to the annual Emerging Trends in Real Estate report, a joint venture of his company and the Urban Land Institute (ULI).

Meanwhile, a recent report from Integra Realty points out that the multifamily sector provides a reminder that no one has repealed the law of cycles.

"The market seeks equilibrium, but its momentum inevitably pushes beyond the point of balance, requiring correction. A few high-end markets have gotten over their skis. However, there are still opportunities to succeed in market niches that have been somewhat neglected-low- and middle-income households whose need for affordable housing seems like afterthoughts during boom times," says the report.

But Adler believes there is no clear-cut answer to the dilemma of creating Class B and C housing stock, which he says boils down to public policy. "In order for developers to build Class B workforce housing in tertiary or secondary markets where supply is sorely needed, there needs to be a fundamental rethinking at the local level of 1) obstacles to permitting and construction time, and 2) the cost of fees and assessments.

"Longer timelines reduce yields and drive new deliveries to upper price points, exacerbating affordability issues. The causes and solutions are local-paradoxically, the places in most need of lower-priced new supply are the locations with the worst business environments.

"If we truly want added supply of Class B apartments, it will require a lot of heavy lifting and I am not optimistic on that score," he said.

While the NMHC proposal for Middle Income Housing Tax Credits would help a bit if funded, it will take all of the above, including changes in energy policy, to have a real impact, he said.

Meanwhile, Adler says that value-add investing is a great way to improve existing housing stock to make it viable for Americans with annual incomes of less than $50,000 and is an attractive strategy for private investors.

"We've identified a number of "18 hour" metros where this play will be attractive-Atlanta, Dallas, Orlando, Seattle, Portland, Tampa, Austin, Charlotte, Nashville, Salt Lake City, Pittsburgh and Kansas City-all places with vibrant tech hubs. But let's be clear, it is not a solution for low-income Americans," he said.

A new normal
The growing number of renter-age households and the 160,000 to 180,000 new jobs expected this year will boost demand for multifamily, said Willet.

And, demand, the biggest driver of supply, is expected to be robust for years, even as long as a decade, says Adler.

The Millennial cohort is projected to increase by two million before it peaks at almost 70 million in 2024, coinciding with a bump in the number of white, college-educated renters relocating to urban areas for the "18-hour" city lifestyle that includes entertainment and access to public transportation. Baby boomers also will impact the market as they downsize.

More good news for the apartment industry is that changes in housing patterns are having a long-term effect on the sector. Homeownership in the U.S. has decreased since the recession and will continue along that trajectory for at least 15 years, according to ULI analysis that projects that by 2030, only 38 percent of Millennials will own homes.

"Homeownership rates may not recover to the levels of 2006 and 2007. People like renting, whether it's for flexibility or it is a cost or credit issue," said Warren.

He expects 2017 will be an exciting time for the industry in terms of new technology, adding that the future is bright for innovative developers to bring new product to the market and find new ways to position that product.