By Bill Donges, CEO Lane Co.
Despite recession fears and the contraction in the real estate market, the apartment sector remains a bright spot, which may grow even brighter in the next few years.
Many things are happening simultaneously:
* Echo boomers are graduating from college in massive numbers, which means a growing pool of 25 to 32-year-old renters.
* Many baby boomers are downsizing and looking for a lifestyle less burdened by the maintenance and upkeep of their homes.
* Families caught in the credit crunch are looking for apartments instead of homes.
* Immigration is increasing, and immigrants are more likely to rent than buy.
Many institutional investors see these changes on the horizon, and don’t want to bet against such a large demographic movement. Apartment investment has done better than the S&P 500 index over the last 10 years, and properties could continue to grow in value. Because of the frenzy of condo conversions, and the state of the capital markets, there is a significantly lower supply of rental housing than in the past. Plus, developers are less likely to start new projects. Preliminary Census Bureau figures indicate that last year, starts of buildings with five or more units dropped to the lowest point in more than ten years.
As demand increases, rents will likely increase. At the recent National Association of Home Builders (NAHB) International Builders Show, ZOM CEO Steve Patterson said rents could exceed historical averages over the next three to five years.
All this means that apartments could remain a very, very powerful investment area through 2010. As a matter of fact, some investors consider the apartment industry an absolutely necessary part of their portfolios.
As for condos, it’s a buyer’s market. Prices are down, supply is high and mortgage rates are at a three year low. Potential buyers have access to a great selection of locations and amenities that may have been off-limits just a few years ago. Plus, developers are offering concessions to move inventory. For people who have a down payment and a reasonable credit score, this is the time to buy.
Condos are particularly attractive because they give access to great locations where buying a single family home could be impractical. Some of the most successful are in key locations with a great lifestyle component, such as transit oriented districts or live/work/play communities such as Atlanta’s Atlantic Station.
Despite the prevalence of “flipping” shows on cable TV, it’s not the time to try to reap a short-term investment. Most of the buyers returning to the market want to live in their homes, not turn them quickly. They are looking at them as value investments.
Eventually, the demand will catch up with the supply. Many projects have been cancelled or converted to rentals, and there are fewer new condo projects. The NAHB says that during the recent boom times, 45 of yearly multifamily starts were condos, but that is expected to drop to 20 to 30 in the future.
While more than 250,000 new condos are expected to hit the market this year, they are not evenly spread across the country. Most are in a few key markets that are already over-built, including Las Vegas, South Florida and California’s Inland Empire. These units represent the final inventory of the last development cycle.
Hopefully, except in the most overbuilt markets, the worst may be behind us. In many places, the over supply is slowly starting to diminish.
The companies that will survive and thrive during these tough times are the ones with vision and stamina as well as strong process, policy and procedures. The most savvy multifamily developers have already begun pinpointing the markets that will continue to attract people because of the availability of jobs and good weather. There will be a demand for all types of homes in these areas, and multifamily is going to be a very important component of the marketplace, both regionally and nationwide.
Bill Donges is CEO of Lane Company, a full-service multifamily real estate firm based in Atlanta.