Believe the Multifamily Hype?
Dallas-Fort Worth View count:
July 5, 2011
Two out of five Bisnow Multifamily Summit panelists agree that the euphoria floating around multifamily CRE rent increases may be premature. Put down your sparklers, clean the beer cans out of the pool, and read on for Day 2 coverage of our event last week at the Westin Galleria.
A crowd of 550 heard Brian Whisnand, newly promoted prez of Henry S. Miller Realty Management, say he's not caught up in the giddiness surrounding the $100 rent increases that everyone's applauding. He says that's happening in a very narrow band of property types like the luxury Class-A in Dallas, Houston, and Austin. The REIT guys think they're gonna get rich. It's the same thing that happened on the merry-go-round that we rode several years ago and that blew up in our faces, he says.
Fairfield Residential Co SVP Brent Ball says two groups are predominantly flocking to apartments: young birdies entering the workforce and the empty nesters selling their homes in favor of apartment rental. Both groups want to be mobile and in an environment with more social activity. (And maybe run into each other once in a while.) The apartment sector looks very positive in Texas for the next three years with good job growth and limited supply. We will, however, have a dearth of new product by 2014. Until then, it's gonna be great.
Brian says that the concept of people as renters by choice isn't entirely accurate. They do comprise part of the market, but there are other people who are renters by necessity because they can't afford a single-family home or can't get financing to purchase. While DFW is experiencing job growth, it's not necessarily translating into household growth. If a spouse has been out of work, then finds a job, it doesn't always mean there's another renter entering the market, he says. For the Class-C and low-end Class-B renter, a lot of their disposable income is going to Exxon and Kroger to cover increased food and fuel prices and not to landlords with higher rents.
Event sponsor ARA principal Brian O'Boyle moderated the panel on regional and Texas trends. He?d know a few things about them: ARA closed 14 deals worth $260M in the last 60 days, with another $120M under contract with hard money expected to close in the next 30 days. Post Properties EVP/regional investment director David Ward says there's a pervasive belief that there's been a systematic permanent shift from home ownership to renters by choice, but he cautions against jumping on that bandwagon. At the end of the day, he says, people still want to own their own home. (Can't have a decent woodworking shop in a rental.) At some point, the prices will seem like a bargain and as apartment rents rise and housing costs dip, people will head back to single-family homes.
David says today's construction prices are down 12% to 15% from the peak of the last cycle in Texas markets. This is more the result of contractors accepting lower margins to keep the doors open versus reduced commodity prices. ?I would expect this discount to evaporate rapidly as construction starts to escalate and contractors seek to regain their profit margins,? David says. The wind is at our back for the next two to three years and we should see strong rent growth during that period, he says. However, if we study our history, then we'll see production escalate and rent growth will become more limited as the cycle reaches maturity.
UDR SVP for development Mark Culwell says he wonders if the preference for apartment rental over home ownership is a psychological hangover resulting from the housing downturn. Some potential young homebuyers are questioning the wisdom of owning a home. They?ve watched their parents and others who lost their jobs unable to move for work because they owned a home and couldn't take the hit to their credit. Other trends he touched on: 60% of leases result from Internet traffic and the decreasing size of infill apartments in urban locations. As the costs increase to go vertical, the unit sizes go down and there are added amenities like gathering places, outdoor courtyards, and game rooms for the social youth.
Invesco acquisitions officer Chris Schmidt says core pricing is getting aggressive but finding true value-add projects is difficult. The value-add projects today rely more on financing power and less on actual strategy. While apartments may become overbuilt, Chris says he doesn't see that happening in the near term with the job and population growth forecasts for Texas. At some point, however, the Class-A, top-quality properties may reach a cap on how high rents go before residents decide to move to less expensive alternatives. Most residents in the high-end projects are renters by choice and are more transient than residents that rent by necessity, he says.
Cadence McShane?s Mike Geach, Dudley & Associates? Sayres Dudley, Cadence McShane?s top dog Neal Harper and Colby Rose. Neal tells us he has two DFW projects ready to start (one is public/private). He couldn't give us details yet but anticipates work starting within the month after all the ink dries. One project is a TOD near a DART station. He says multifamily is building momentum there, but financing is still borderline. If the deal isn't a slam dunk, it still takes a while to get financing; although the projects that were slated to start one to two years ago are finally get funding lined up. He says Cadence McShane in Atlanta is knocking 'em dead in affordable and tax credit properties and Chicago has a lot of tax credit projects going on.