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