For Developers, Apartments Still a Safe Bet

After a boom, demand for multi-family housing will settle, according to forecast.

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Reuters

The recession and housing crash has pushed a lot of people into rental housing and multi-family housing like apartments. The real estate industry has noticed.

According to the real estate services firm CBRE, the nationwide vacancy rate for apartment buildings dropped from 7.4 percent in 2009 to 5.2 percent in 2011. In 2011 alone, rental rates jumped nearly 5 percent. For real estate developers, apartment building is one of the few places where the money's been for the past few years. And it that continue to be the case for the next few years, according to a new set of projections in the Urban Land Institute's Real Estate Consensus Forecast [PDF]. The forecast, based on a survey of dozens of real estate economists and analysts, predicts that apartments and multifamily housing will continue to provide favorable returns to developers for at least the next three years.

The forecast predicts that apartment vacancy rates will remain in the low 5 percent area through 2014, and that developers are trying to meet this demand by building more apartment buildings, especially in cities.

"There's a lot of new supply gearing up, particularly in the better markets," says David Lynn, managing director of the real estate investment management firm Clarion Partners and one of the respondents on a recent panel discussing the new ULI forecast.

Older people, especially empty nesters, are also fueling some of the demand for apartment housing in cities, says Lynn.

But another one of the panelists is a little skeptical that this back-to-the-city trend is as widely spread as some might think.

"A few cities, and I do stress a few cities, they get a lot publicity, and a few downtowns, they get a lot of publicity," says Peter Linneman, CEO of the American Land Fund. "The real truth is we are sufficiently suburbanized with our retail and our job locations that the increase in energy prices doesn’t force people [into city centers] as much as people think. They're already pretty close to where they work and where they shop, even if they're a really long way out."

He says that for all the people choosing to move into city centers, there are far more people choosing to move out to the suburbs.

"We're a net-suburbanizing population," Linneman says. "All the surveys of renters still show they prefer to own if they can, so I don’t know if that part will change."

Though some analysts point to the fact that multi-family construction has tripled over the past year and a half, Linneman says it's still only half of the historical norm.

But others see the tide shifting. Another panelist discussing the ULI forecast, Kenneth Rosen, chairman of the Rosen Consulting Group, argues that the sheer demographics indicate that the demand for multi-family rental housing is not likely to go away.

"We have about 4.3 million people per year turning age 18 and those people, when they do get jobs, will eventually be renters," says Rosen. "Right now we've had a number of people, after they graduate, they don’t get jobs and move home with their parents. That will change once the job market gets better."

However, all three of the panelists expressed concerns that the high returns developers have seen in recent years from their apartment projects have created a rush to build more and more multifamily. By 2014 or 2015, that could translate into what Lynn calls an "excessive amount of supply."

The ULI forecast suggests that the high returns developers have seen over the past few years will begin to simmer down, falling from a recent high of 18.2 percent in 2010 down to 8.8 percent by 2014. Though apartment projects may not continue to be the big money makers developers cashed in on in the immediate aftermath of the recession, they likely will be in demand – and a solid, if only moderate, source of income for those who build them.

Photo credit: Darren Staples / Reuters

About the Author

  • Nate Berg is a freelance reporter and a former staff writer for CityLab. He lives in Los Angeles.