The above activities are only the tip of
the iceberg when it comes to multifamily
investment and development—and all of
what was mentioned are infill projects. But
things are starting to change when it comes
to infill, at least in some geographic markets. “Earlier in the building cycle, everything was mostly infill, mostly urban core.
But that core has started to spread. At some
point, it had to. There are only so many
places to build,” comments Ron Johnsey,
president of Dallas-based apartment
research company AXIOMetrics Inc.
And on the investment side, at least in
the New Jersey area, Kenneth Uranowitz,
president of Gebroe-Hammer Associates,
points out that both infill and suburban
product is getting a lot of attention from
investors. “There’s such a dearth of inventory, it’s making even the secondary and
tertiary markets, and the value-add plays,
even more attractive,” Uranowitz says.
There are a few reasons for the shift to
suburbia and secondary and tertiary mar-
kets. Gwin says that, from a development
standpoint, urban infill has become expen-
sive to build. Land, which is skyrocketing in
price seemingly everywhere, seems to be
more expensive downtown rather than in
the suburbs. And Uranowitz points out that
infill properties are known for their high
barriers to entry, which also boosts their
price per pound. “We just sold a property in
South Orange, NJ called the Avenue. It’s
adjacent to the Midtown Direct train,” he
says. That property sold for more than
$400,000 per unit, which set a record for
New Jersey multifamily sales. And investors
are seeing cap rates compress on those
infills as well. “When those high-barrier-to-
entry buildings come to market, they’re in
the sub-5% cap rate, or even lower.”
The same seems to be trending on the
West Coast. Dean Zander, senior partner
with Hendricks-Berkadia’s West Los
Angeles office, says that the most aggres-
sive money is chasing the infill locations,
particularly in Los Angeles and Orange
County. “Infill is the number-one choice,”
he says. But much like Uranowitz and Gwin
have pointed out, Zander says the second-
ary and suburban markets are definitely on
the radar screen, mainly because there
isn’t enough supply to meet investors’ hun-
ger for infill product. Just as importantly, “a
lot of investors are starting to get priced
out of those coastal markets.”
Developers are also finding that there is
a finite market to which that infill product
can be targeted. Many of the urban units
coming on line are geared toward the high-
end, younger, more affluent investor who
has a lot of money to burn. But the overall
renter profile may not fit that mold.
“When you build all-urban, you’re delivering the property at the top of the market,
whereas when you develop product in the
suburbs, you can spread the price points
around,” explains Jay Denton, vice president of research with Axiometrics Inc. In
Dallas’ Uptown market, for example, rents
can top $1,400 a month for a one-bedroom
unit. In suburban Plano, TX, however, a
renter could find a two-bedroom apartment for $1,100 a month. As such, “a developer can get more people who can afford
that rent,” Denton observes. “That’s one
There’s
such a
dearth of
inventory,
it’s making
even the
secondary and tertiary
markets, and the value-
add plays, even more
attractive.”
KENNETH URANOWITZ
Gebroe-Hammer Associates
reason they’re going out there.”
Another driver is that rents are starting
to justify the costs of investments and
development in the suburban and smaller
market product. Gwin, whose company
invests a great deal in Texas, points out
jobs are increasing, not just within the
CBDs, but in secondary and suburban
markets as well. “We’re not seeing jobs just
in Dallas’ CBD,” he says. “We’re seeing
them in Frisco, TX and Alliance (in far
north Fort Worth) as well.”
Hendricks-Berkadia partner Vince
Norris, who operates out of the company’s
Woodland Hills, CA office, agrees with the
assessment, pointing out that with jobs and,
therefore, employees moving to suburbia,
there is less incentive for renters to move
downtown. “Those who live in suburbia
now, rather than the core central locations,
won’t relocate or even travel to downtown
unless they absolutely have to,” he says.
Job creation certainly fuels multifamily
demand, but Maximus Advisors’ Muoio
says there is much more to it these days. He
explains that, in the immediate aftermath
of the financial meltdown, a distaste for
homeownership tended to drive occupancy
rates among multifamily housing. But
beginning in 2012, that changed.
“What’s happening is that we’ve started
to see household formation rates, which
were severely depressed, begin to pop above
cyclical demand levels,” Muoio explains. In
other words, what’s been happening is that
younger adults are leaving their parents’
houses and looking for their own nests to
feather. Roommates are starting to split up
and increased immigration is also feeding
demand. Though household formation has
allegedly been recovering since the end of
the recession in 2009, “it wasn’t until late
2011 that we really started seeing it take
effect among single family and multifamily,” Muoio comments. This is why trends
have been pointing to increased demand
for, and acquisitions of, single-family homes.
Furthermore, in certain parts of the country, more single-family permits are being
pulled as the taint of home ownership
appears to wane.
But no one is anticipating a flight to
single-family ownership. For one thing,
the borrowing qualifications for owner-
ship continue to be quite stringent. And,
Zander points out, as single-family homes
prices continue to accelerate, they’ll likely
price would-be homebuyers out of the
market. “It’s hard for first-time buyers to
move out of their apartments to buy a
home,” he says. “So they’re remaining
renters for longer periods.”
All of this supports the continued trend
toward renter demand for multifamily. But
even with this demand, effective rent
growth, especially among infill multifamily
has, surprisingly, slowed. It hasn’t gone
negative by any stretch of the imagination,
but the slowdown is apparent.
Johnsey notes that even in infill areas in
which land is still available, slower rent
growth overall for class A properties means
more difficulty in financing new infill developments. “Some of our clients are looking
for opportunities in suburban areas because
of it,” he observes.
But why, if there continues to be
demand for multifamily, has effective rent
growth slowed? Denton points out that
class A product, especially in certain geographic infill areas, is starting to be
impacted by oversupply. This, in turn,
means that owners of existing properties
are likely to depress rental rates to boost
absorption. As such, “urban core develop-
