![]() The Dallas-Fort Worth metropolitan area remains one of the country’s strongest markets for multifamily investment with demand for apartments increasing as corporations expand. By offering new job opportunities and payroll increases, companies like Charles Schwab and TD Ameritrade continue to drive migration, which has reduced vacancy rates while driving up rents. In fact, the average effective rent for the area recently hit a record high of more than $1,000 per month. Because the need for apartments continues to outpace supply, builders have significantly increased their efforts and delivered many more units in 2016 than in past years. Construction will continue at this pace with several new high-rise complexes slated for the Intown Dallas market. Additionally, renovations are set to convert warehouse and office space in Downtown Dallas into new multifamily structures. While the recent boost to construction will likely inflate the vacancy rate, this increase will likely prove temporary because of growing tenant demand. This demand will also keep the average effective rent high.
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![]() In a recent interview with Scotsman Guide, National Multifamily Housing Council chief economist Mark Obrinsky said he believes the multifamily housing market will remain strong, especially in urban centers where it has seen steady growth in recent years. Obrinsky said he has not seen any indicators that the market will retract, pointing out that rent has continued to increase for longer than expected and that as home prices increase, the market will tip in favor of renting. The increasing population in the United States also will require more home ownership and rental space, he said. Millennials, like all generations in their 20s, are more likely to rent, and the long-term trend of young families waiting longer to buy property continues to benefit the rental market. Apartment construction has finally caught up with demand, Obrinsky noted, which means rent growth should level out to solid 3 percent or 4 percent increases until the new space is leased out. When that happens, rents could increase. ![]() The U.S. Department of Housing and Urban Development (HUD) has proposed new rules that would require owners and developers of HUD-funded multifamily housing to install broadband infrastructure that is accessible to all units. The requirement, which would apply to all new buildings or buildings undergoing significant renovation, is part of a larger initiative to address the “digital divide.” Multifamily rentals with a mortgage insured by the Federal Housing Administration or that have a loan that falls under a HUD loan guarantee program are exempt from the broadband requirement. Owners and developers would be required to install cables, wiring, fiber optics, or other infrastructure that provides broadband service to each unit. The requirement only applies to the property; owners and developers would not have to provide a connection between the property and an Internet provider. Other programs and nonprofit organizations would be expected to offer this service at low or no cost. HUD would consider exceptions to the rule if a building’s location or characteristics make broadband infrastructure installment unfeasible. ![]() After lackluster construction numbers in April, multifamily building rebounded in May and posted a strong 15 percent increase. Much of the construction activity came from eight multifamily projects with values of at least $100 million in large cities across the United States, including major projects that broke ground in New York City; Jersey City, New Jersey; and Chicago in May. The multifamily projects in these cities represent almost $1.5 billion in investment in apartment towers and a mixed-use high-rise. Five major projects broke ground in April. New York continues to lead the United States in terms of new construction of multifamily projects. The other top-five metropolitan areas are Miami, Chicago, Boston, and Los Angeles. Rounding out the top 10 for new multifamily construction are San Francisco; Washington, DC; Denver; Atlanta; and Dallas-Fort Worth. In fact, eight of these ten urban regions have posted double-digit increases in construction in the past year. ![]() In today’s multifamily market, developers and investors are moving to take advantage of the growing demand among renters for value-add class-B and class-C apartment buildings. Essentially, with so much class-A and luxury construction currently underway, a gap has opened up in the market: apartments that can cater to middle-class tenants. These value-add projects operate on the principle of renovating and improving an older building, raising rents, and attracting tenants who are looking for something more than an aging class-B or class-C property, but who can’t afford the rents typically charged for newly built class-A units. Such projects, which work best in markets where the average rental cost of a class-B or class-C unit is significantly less than a class-A unit, allow developers and investors to benefit from the strong overall demand for rental housing without having to compete directly with newly constructed luxury properties. Additionally, investors still pay substantially less (relative to income) for class-B and class-C multifamily properties than for class-A properties. Typical cap rates accepted by investors purchasing class-B and class-C properties are currently about 220 basis points higher than the same rates for class-A assets, meaning that value-add class-B and class-C properties are becoming an increasingly smart choice for investors. ![]() In spite of the gains made in the second half of 2015, the home ownership rate in the United States fell during the first quarter of 2016 to a seasonally adjusted 63.6 percent. That’s a mere one-tenth of one basis point higher than the rate’s all-time historic low, which occurred in the second quarter of 2015. A major contributing factor to this low rate of home ownership among young Americans is a combination of high student debt, tight mortgage standards, and rapidly rising home prices. Simply having a job no longer automatically translates to home ownership for young people today. The home ownership rate for people aged 25 to 34 is nearly 10 percent lower today than a decade ago. Furthermore, among all of today’s buyers, first-time homebuyers comprise barely 30 percent, a figure that has traditionally been closer to 40 percent. For multifamily real estate investors, however, these numbers are good news. Not only is household formation increasing, but a full two-thirds of new households are renter households, and just one-third of such households are owner-occupied homes. Nationwide, homeownership is highest in the Midwest and lowest in the West. ![]() In May and July of 2015, 37th Parallel Properties expanded its holdings in the thriving Houston, Texas, real estate market with the acquisition of two commercial multifamily properties. The first, located in the Westchase Business district, comprises 96 one-bedroom and 68 two-bedroom apartment units, as well as 18 townhome-style apartments in both single- and two-bedroom floor plans. The community features amenities such as on-site laundry facilities, a swimming pool, and a clubhouse, and is conveniently located near major highways, downtown Houston, and the Galleria shopping and dining complex. 37th Parallel also purchased a 149-unit apartment complex located in the Houston suburb of Deer Park area. Conveniently positioned near several major petrochemical employers, a significant driver of the local economy, the community is one of the few multifamily properties in the area. The property offers 29 one-bedroom townhomes, 80 two-bedroom apartments, and 40 one-bedroom units, and provides residents with an on-site clubhouse, swimming pool, and dog park. ![]() For real estate investors seeking an appropriate commercial multifamily market, employment growth is one of the most important factors to consider. Employment growth in a given market has a direct effect on population growth, which in turn has a direct effect on rental demand. When analyzing employment growth in a region, commercial multifamily investors often start by gaining an understanding of job creation trends. As a general rule, larger job markets play host to more job creators, allowing for increased stability of the overall employment level. However, it is also important to consider the composition of employers in a market. Manufacturing and virtual service jobs tend to be highly unpredictable, while government and health care jobs rarely move out of a market. The demographics of job holders in a market also play an important role in employment growth. Since the 18-34 year-old demographic is the most likely to rent, investors pay careful attention to jobs held predominantly by that age group. If jobs are being created with this demographic in mind, it is reasonable to assume that rental demand will increase as well. ![]() Choosing a market for commercial multifamily investing typically involves considerations such as population growth and employment growth, which relate directly to the demand for rentals. However, less obvious factors such as landlord-tenant laws can also have a significant impact on a prospective rental market. Multifamily apartments are subject to a wide range of regulations, from federal equal housing laws all the way down to local business practices. As such, rental terms are almost never exclusively in the hands of the property owner. Policies can alter a wide variety of rental areas, including required property living standards, allowable marketing practices, taxes, and tenants’ rights. In terms of landlord-tenant law specifically, ideal markets will provide favorable treatment of landlords in cases involving eviction and bad debt. In the best-case scenario, evictions will take no more than 30 to 45 days, and tenants will be held responsible for economic harm to the landlord. ![]() In the area of commercial multifamily real estate, choosing a quality market is one of the most crucial first steps an investor can take. However, the work doesn’t stop there. Not all segments of a market are equal, and investors should work to find the best possible submarkets. In order to determine the quality of a submarket, investors often start by looking at crime rates within a given market. In addition to calling local precincts and using websites such as SpotCrime.com, investors can look at relative crime rates compared with the rest of a given market. Submarkets with crime rates in the top 50 percent regularly underperform in areas such as rentability, eviction rates, and rent growth. In addition, investors can assess the value of a submarket by looking at its proximity to retail, entertainment, and jobs. While it may be obvious to analyze a property’s proximity to retail destinations, it is also important to match asset quality to the quality of retail in the area. Owning a lower-grade asset in a higher-grade market can produce significant returns on investment, but the opposite situation can result in an underperforming asset. |
AuthorAn experienced real estate investor and co-founder of 37th Parallel Properties in Richmond, Virginia, Chad Doty has established himself as a leader in commercial multifamily real estate. Archives
January 2017
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