Demand, Capital Driving Apartment Market

Posted on June 1, 2012

Continued positive multifamily demand fundamentals and ready access to capital at attractive rates is fueling a surge in new apartment development, according to industry executives.

Several hundred senior-level apartment executives gathered in Scottsdale, AZ, last week for National Multi Housing Council’s (NMHC) Apartment Strategies/Finance Conference and Spring Board of Directors Meeting. The following is the NMHC’s summary of what was discussed.

Continued low levels of new supply have led to a big bounce-back in rents as demand outpaces new construction. According to one panel of apartment executives, the new supply shortfall may be larger than once thought — as many as 700,000 to 1 million units — because many of the apartments built in recent years have been in the affordable, rather than market-rate, section of the market. Moreover, much of the current apartment stock dates back to the 1970s and is becoming obsolete, creating additional demand for new supply.

Select areas have seen such large upticks in the number of planned and under construction units that could turn into hot spots for potential overbuilding. In particular, certain submarkets of Phoenix, Seattle and Washington, D.C., appear somewhat at risk.

But, overall, new completions are still a very low percentage of total inventory.

Money Flowing for Multifamily

There is a wall of private capital that wants into the multifamily space. More than 250 private equity funds currently are looking to do multifamily deals-57 of which are apartments-only funds, while the balance are diversified funds looking for a slice of the multifamily action.

“Our investors can’t get enough of multifamily,” said Steve Pogarsky, vice president of multifamily acquisitions for BPG Properties/Madison Apartment Group. “We have to contain their enthusiasm.”

Life companies also continue to up their investment in the multifamily space; they invested $11 billion in sector in 2011. While their target exposure to multifamily real estate had been 15 to 20% of their portfolio, the major players have upped that to roughly 25%.

“It’s just getting the deals done that’s the problem,” said Mark Hafner, managing director for investments at Greystar Real Estate Partners. “You have a supply-demand imbalance,” he said, pointing out that out of $166 billion in commitments in 2011, just $44 billion closed. For now, a lot of so-called “dry powder” is collecting on the sidelines, waiting for the right deals.

Beyond acquisitions and dispositions, the construction lending market is also going through a transformation that may tap the brakes on the apartment sector’s activity and growth.

Many big projects also are getting “clubbed” together as handfuls of investors mitigate risk in a project by joining forces. And because big banks don’t have syndication departments anymore, companies are spending a year or more talking to various lenders to cobble together a deal.

But Tom Booher, executive vice president at PNC Real Estate, said he’s seeing regional banks ramp up on their construction lending. Some of the most aggressive terms on construction he’s seen have been for smaller deals in Midwestern markets like Cincinnati, Columbus, Indianapolis and Toledo.

By Mark Heschmeyer, Costar Group