Apartment Rentals On The Rebound - Firms Warned To Prep For Growth

Every cloud has a silver lining, usually shining on somebody else. Now, with the owner-occupied sector of housing in a downturn, it is the apartment industry's turn.

The National Multi-Housing Council (NMHC) recently declared "It's official. The dark days of the apartment market recession are officially over." This euphoric claim is contained in the annual report of the national association which represents 1000 members from the apartment development, marketing and management industries. The report went on to say that the current demand for rental housing is at remarkable levels because rising interest rates and skyrocketing housing costs are keeping many would-be buyers in apartments while supply is relatively constrained by escalating land and construction costs the conversion of thousands of rental units to condominiums.

"This 'best of both worlds' situation has led to rising rents, falling vacancy rates, disappearing concessions and strong capital flows into the sector. In short, 2006 will likely go down as the best year for apartments in the past two decades."

But NMHC warns that, to exploit this demand requires more than simply building more apartments. Apartment firms need to "rethink what they build, where they build and how they build," keeping in mind four factors that are already changing the rental housing sector: demographics, proximity, sustainability, and affordability.

DEMOGRAPHICS

The renter pool has not changed much over the last decade but, in the next eight years it is expected to increase by at least 1.8 million households. What apartment firms must know, however, is that minorities will be responsible for the entire gain and will eventually account for the majority of renter households. One in five heads of households is either foreign born or the native-born child of an immigrant and fully half of these are Hispanic who now account for 54 percent of immigrant renters, a number that grows every year. Additionally, these households are no longer congregating in the large gateway cities but are moving to every region of the country and 40 percent are now living in the suburbs.

NMHC advises its member firms that the future of rental housing is focused on Hispanics. Apartment owners will find it necessary to deal with the language and cultural needs created by this diversity. Spanish speaking staff, bilingual marketing materials and leases will be needed and apartment design must evolve to provide units with more bedrooms and amenities such as activities for children.

Complicating this, however, is that the other major demographic trend is the huge echo boomer generation of 78 million young people who will soon establish their own households. This group will demand quite a different lifestyle. Instead of spacious apartments to accommodate larger families these singles and childless couples will accept smaller apartments as long as they come with high tech amenities and are located in urban or urban-type neighborhoods. Savvy developers, NMHC advises, will diversify the choices they offer so as to capture both markets.

PROXIMITY

Couples with children have dominated the housing market for decades but today they make up less than 22 percent of U.S. households, giving way to young professionals, empty nesters, single parents, and couples without children These groups are driving the hottest trend in real estate, higher-density, mixed-use neighborhoods that offer live/work/walk/play lifestyles.

Mixed-use neighborhoods have been around forever. In fact they used to be the way America lived, but developing these today requires new and more sophisticated skills. "The opportunities are more complex; the deals riskier; capital is harder to obtain and more expensive, and success typically requires participation from the public sector." And every development is different and must meet the needs of the specific community. Apartment firms can no longer spin off cookie cutter projects that can be plunked down on any piece of land. Today they have to think about how a project fits into the neighborhood and how the uses in the mix suit the specific market. This includes considering the development's size and how it connects with existing walkways and transportation systems. Firms need to create a sense of place. Public agencies are encouraging this type of building and that is driving the mixed-use trend. NMHC predicts that the demand for this old/new lifestyle will ultimately justify the risks of building for it.

SUSTAINABILITY

Like in every other aspect of housing, maybe even of life, green is in. In the apartment sector federal and state tax incentives, rising energy costs, and the social conscience of investors are forcing apartment firms to adopt green building principles and practices. Government authorities are pushing green building programs that require properties to achieve certain levels of energy efficiency under the U.S. Green Building Council's Leadership in Energy and Environmental Design (LEED) program and capital markets are increasingly incorporating green building factors into their investment formulas.

With growing demand for green building materials and a growing technology it is now possible to build green at a price that may be as low as one to two percent over traditional construction costs; an investment that may be quickly repaid in lower operating costs and perhaps even rent premiums. Attendees at an NMHC sponsored roundtable last year reported rents that were five to ten percent higher in green buildings than in traditional structures.

AFFORDABILITY

According to NMHC, the 2002 Millennial Housing Commission called affordability the "single greatest housing challenge facing the nation." And little has changed in the intervening five years. In fact the problem has gotten worse. Housing costs are carving such a hole in family budgets that consumers must cut back on food, health care, and transportation to compensate

The fastest growing industries in the U.S. are those that pay the lowest wages and 42 million households earned less than the $33,925 annual income necessary to rent an affordable two-bedroom apartment last year. The lack of affordability is widespread and many workers are now forced to move further from their jobs, exacerbating traffic congestion and urban sprawl.

Unlike manufacturing or other sectors of the economy, housing providers can't simply rev up production to meet the demand for affordable housing. High land and construction costs and regulatory barriers imposed by governments make it difficult to increase supply and neighborhood opposition, density restrictions and building codes also inhibit affordable housing production. Add to this declining federal housing subsidies and it is obvious that solving the affordability problem is up to state and local housing authorities which, in NMHC's view have turned to "misguided" measures such as rent control to address the issue.

"Unlike the other major trends driving the apartment industry, such as changing demographics ...the affordable housing shortage cannot be solved by simply adapting our business models."

"Ultimately there will be no single solution to this problem." We must harness the power of the private sector and to do that requires creating financing tools, a plan to address community opposition, fewer regulatory barriers, and less red tape. NMHC says it has already initiated a number of best practices and to share those with elected officials.

"Moving beyond conceptual discussions to actually housing the nation's workers will require bold and innovate action by the nation's apartment firms," NMHC states, "But if we don't do it, who will?"