In the multifamily market, project underwriting has tightened across the board because capital providers are concerned that the sector is late in the cycle, according to Chris McKee, head of development at CRG, the real estate development arm of Clayco. McKee explains that while trended rents used to attract equity providers, there’s now a reluctance to underwrite projects unless they’re at flat rents. Tariffs have only exacerbated that effect.
“We’re seeing contractors start to plan for increased costs,” McKee says. “Steel and aluminum companies know the tariff increases are coming, and they’re passing the costs along to general contractors. With flat rents and construction costs on the rise, spreads have been squeezed and multifamily projects became more difficult to underwrite. Tariffs have only added to that, and that trend will likely continue for the foreseeable future.”
McKee notes that trended rents still drive multifamily developments in certain markets where availability is tight, such as Seattle, Lehigh Valley in Pennsylvania and Inland Empire in Southern California. Less constricted markets, however, require more caution. “You may get squeezed a little bit by those cost increases because you may not have the rent increases that you would get in some of the tighter submarkets,” McKee says…
When it comes to managing multifamily projects, McKee stresses focusing on fundamentals and relationships. “Look for the right opportunity in the right location,” he says. “If you have a long-standing relationship with an equity or debt provider, you can make a case for rent increases specific to a high-growth micro-market, such as Tampa or Fort Worth. It’s an advantage to have pre-existing relationships with equity lenders who trust and believe in you. So when you go to show them something, they know you’ll deliver.”
Nationwide there is still ample demand for new apartments, but a shortage in construction labor is limiting the number of units being delivered. From an article on Realtor.com:
Rising construction costs and a tight labor market are slowing a nearly decade long apartment boom, likely easing a burgeoning glut at the top end of the market that has been forming across the U.S.
Multifamily building permits have fallen each month since March, according to federal data. That type of slowdown suggests there should be less new apartment construction over the next two years, the typical time it takes to build an apartment property of any scale…
“The demand is there,” said Paula Munger, the National Apartment Association’s director of industry research and analysis, referring to tenants. “But labor’s a big deal. It varies by position, but in general that’s what we’re hearing from our members. The actual completions are being more and more delayed for that reason.”
One silver lining from the delayed construction is that it will help reduce some of the inventory at the high end of the market, which has seen the most activity over the last few years and reverse the recent slow down in rent growth.
North High Point is experiencing a significant amount of growth, and now it looks like the area might be getting a 600-unit housing development, including apartments. From an item in the Triad Business Journal:
The report says that Bunker Land Group LLC filed zoning applications with the city to build the units on about 80 acres near N.C. 66 and North Main Street, just south of Interstate 74.
Bunker wants to build 350 multifamily units, filling in the rest with single-family homes, twin homes and townhomes.
…Alexander has settled on 217 apartment units in three buildings, leaving the first floor of a four-story building near the corner of Fairview and Ninth for retail and restaurant space. He said the remaining three floors of that building, plus all seven floors of an adjoining building, will become storage space…
…plans call for the approximately 100,000 square feet of retail and storage space to be complete by June. He said the apartments, which make up the remainder of the approximately 470,000-square-foot project, are scheduled to be finished in August 2020.
According to a recent filing with the NC Department of Environmental Quality there are plans to build a 238-unit apartment community adjacent to one of the Triad’s premier golf facilities. From the Triad Business Journal:
Koury Corp. is eyeing a 238-unit apartment complex in Grandover, according to a permit application filed with the N.C. Department of Environmental Quality…
The proposed complex would consist of five buildings with a mix of one-, two- and three-bedroom layouts. The buildings also would have eight garages and 455 parking spaces…
Koury is proposing that the five-building complex go on the western side of the fairway, which would place it between the fairway and Koury’s planned Grandover Village shopping center, divided by the new Grandover Village Road.
The National Apartment Association will be publishing an in-depth article and blog post on rising construction input costs, but in the meantime, they offered us some basic data comparing the Producer Price Index (not seasonally adjusted) in May 2018 vs. May 2017:
The National Multifamily Housing Council (NMHC) and National Association of Home Builders (NAHB) released the results of research that found that regulation imposed at various levels of government accounts for 32.1% of multifamily development costs. From an article in Multifamily Executive:
These regulatory costs include a broad range of fees, standards, and other requirements imposed at different stages of the development and construction process. According to the study, 7% of regulatory costs come from building-code changes over the past 10 years, 5.9% is attributable to development requirements (such as streets, sidewalks, parking, landscaping, and architectural design) that go beyond what the developer would ordinarily provide, and 4.2% of the costs come from nonrefundable fees charged when site work begins.
Over 90% of developers surveyed in the research typically incur hard costs of paying fees to local jurisdictions, both when applying for zoning approval and again when local jurisdictions authorize the construction of buildings. The typical projects of almost all the respondents (98%) were subject to costs at the zoning-approval stage, costing an average 4.1% of the total development costs.
They go on to note that these costs have a direct impact on housing affordability, which is an issue being addressed by almost every municipality in the country, including here in the Piedmont Triad:
“The current regulatory framework has limited the amount of housing that can be built and increased the cost of what is produced,” said NMHC president Doug Bibby in a statement. “At a time when states and localities are struggling to address housing affordability challenges, public and private stakeholders should work together to streamline regulations and take the steps necessary to expand housing in communities across the country.”
According to this article in the Wall Street Journal, new housing construction in the US rose to its highest level since 2007, and multifamily construction had a lot to do with it:
Nonetheless, housing construction appears on track to have a slightly better year than many economists had predicted, thanks in part to surprisingly strong multifamily growth.
Overall starts grew by 11% in the first five months of 2018 compared with the same period a year earlier. Multifamily starts rose 13.3% during that period, while single-family starts rose 9.8%.
But, there are challenges:
Still, builders face headwinds in the coming months. Rising lumber prices have added nearly $9,000 to the cost of a new home since January 2017, according to the National Association of Home Builders, which reported on Monday that builder confidence ticked down slightly in June.
Over the past year prices for lumber have skyrocketed and that has put added pressure on homebuilders and apartment developers alike. From an article in the Wall Street Journal:
The bad news: wood prices are still up 67% over the past year, adding thousands of dollars to the cost of each new house.
The historic run-up in lumber prices–attributable to a trade dispute with Canada, wildfires and limited rail capacity–comes as U.S. home builders are already struggling to meet demand amid shortages in buildable lots and labor…
For a generation setting off to start families in the suburbs, pricier construction materials are another hurdle to homeownership, on top of rising borrowing costs and competition from institutional investors, who are gobbling up homes to turn into rentals in some of the country’s hottest markets.
Apartment developers are also facing skyrocketing costs and, according to several who are members of PTAA, it’s affecting their ability to do deals. One said in an email exchange that his company has passed on several otherwise good projects because cost far outpaces rental rate.
This news is not good for housing affordability either. We’re already seeing an imbalance between supply and demand which will only be exacerbated by higher costs and suppressed development. Until development can catch up with demand it’s hard to see a way in which the affordability question can be answered.
The Mebane Planning Board recently approved plans submitted by Keystone Homes for Mebane Town Center, a 45-acre multi-use development. From the Triad Business Journal:
Plans were submitted in March to the city for Mebane Towne Center, which would include 50,000 square feet of retail, 171 townhomes and 416 apartments. It also would include a dog park, pools, clubhouses, 12 acres of open space and a bike trail, along with almost 50,000 square feet of ground-floor retail space.
The plans will go before Mebane City Council in May for final approval.