How Will Tariffs Affect Multifamily Development?

In a post on the BMO Harris Bank site, Managing Director and Head of US Commercial Real Estate Kim Liautaud looks at how tariffs could impact multifamily development:

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.”

Multifamily New Construction Highest Since 1987

Multifamily construction is at its highest level in almost 30 years, but experts expect it to dip in the near future:

New construction of buildings with more than five units jumped 28.6% in June, hitting its highest level since 1987.

But the spike likely has more to do with a surge of activity in New York City last month right before tax incentives for multifamily developments were scheduled to expire.

“We have to expect a big correction in July,” Pantheon Macroeconomics Chief Economist Ian Shepherdson said in a note to clients.

If you read the entire article you’ll see that single family construction is also on the rise, but the growth is relatively mild compared to multifamily construction and that trend is likely to hold for the foreseeable future.

New-Home Construction Shifts to Apartments

From the Wall Street Journal:

The share of new homes being built as rental apartments is at the highest level in at least four decades, as an improving jobs picture spurs younger Americans to form their own households but tighter lending standards make it more difficult to buy.

Residential construction—a pillar of the economy and employment—is starting to ramp up again overall, but in previous years the growth was driven by single-family homes. Last year, according to census data, construction was started on a little less than one million new residential units, and about one in three of those was a rental in a multifamily building, the highest share since data began in the mid-1970s. Single-family homes accounted for about two-thirds of housing starts last year, down from their peak of 87% in 1993 and about 80% in the years leading up to the recession, the census data showed…

“Builders are betting on more millennials leaving the nest this year,” said Jed Kolko, chief economist at Trulia, a real-estate site. “But young people don’t get a job one day and buy a home the next. The improving jobs picture for young adults will mean more renters this year, not a surge in first-time home buyers.”

That shorter-term growth in rental demand is combining with long-run demographic trends that are expected to continue to tilt U.S. home construction toward “multifamily” units, a category that includes everything from garden-style apartments to towering condominiums. The baby-boom generation is moving into retirement and empty-nesthood, prompting many to downsize to smaller quarters. The generations behind them, meantime, are having fewer children, later in life, so need less space.

Jordan Rappaport, an economist at the Federal Reserve Bank of Kansas City, projects that by the end of this decade, single-family-home construction will top out somewhere around its pre-housing-boom level of roughly 1.3 million new homes a year. Multifamily units, by contrast, are projected to increase to an annual rate of 550,000 new units a year, or roughly twice the rate of today.

Multifamily Developer Confidence at All-Time High

From Floor Covering Weekly:

Production of apartments and condominiums gained momentum in the second quarter of 2013, according to the latest Multifamily Production Index (MPI), released today by the National Association of Home Builders (NAHB). The index increased nine points to 61, which is the highest reading since its inception in 2003…

“Multifamily developer confidence is currently at an all-time high according to our survey results, and we expect to see that continue for the foreseeable future,” said W. Dean Henry, chairman of NAHB’s Multifamily Leadership Board. “Much of the consumer demand that we are now seeing is coming from a large generation of young people who are able to find jobs and establish their own households as the economy continues to improve.”

“The apartment and condo sector continues to expand production,” said NAHB chief economist David Crowe. “This increased level of activity is needed to meet current demand and to compensate for a serious lack of new units developed during the housing downturn.”

(h/t to Matt Ketterman for sending us a link to the article)

2012 Mid-Year Construction Forecast

From Multifamily Executive:

Multifamily, on the other hand, is projected to slow down in terms of new starts in the coming years. In 2011, multifamily starts were up 56 percent. By the end of 2012, it is expected to grow 27 percent more. But in 2013, Crowe is expecting new starts to rise by only 6 percent, at 238,000 new starts. “We’ll still see an increase but it won’t be quite as dramatic, as we begin to catch up with the backlog needed to fill the rental demand,” said Crowe.

For now, multifamily will continue to ride the wave of high rental demand. Recently released data from Freddie Mac shows that for the year ending 2012, 1.5 million households moved into rental housing. And vacancy rates have dropped 2 percentage points nationally in the past two years. So single family still has a long way to go before it coaxes all these new renters back into homeownership.

“Further increases in rental demand are likely in the coming year as newly formed households postpone homeownership decisions until the economy strengthens and they have accumulated sufficient savings. Overall apartment market trends may show further vacancy declines and rent gains, with property values improving as well,” said Freddie Mac’s Chief Economist Frank Nothaft.