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Saturday, December 18, 2010

Apartments: Inflection Point

by Calculated Risk on 12/18/2010 08:35:00 PM

I try to pass on what I'm hearing. It was back in June that I noted

I spoke with a large apartment owner in Texas who told me they are seeing effective rents rising over the last few months.

I've also heard that the mood really changed at the NMHC meeting in May compared to the January meeting. There is a growing consensus among large apartment owners that rents have bottomed and the industry will rebound in 2011.
I'll be attending the NMHC meeting in January 2011 (Palm Springs), and I'll report on what I hear. I think we are past the inflection point for apartments (vacancy rate has peaked, rents and construction have bottomed).

There was an interesting interview by Jeff Collins at the OC Register today with a Los Angeles area architect Thomas Cox: Apartments reviving architect’s business
Us: When did things start picking up? How busy are you now?

Tom: For us at TCA, we really felt the housing industry slide in mid-2008 and it was significant. 2009 was the worst. ... Jan. 5, I received a call that we won [a] design competition. This was a major turning point for us.

Several months later, we landed another large multifamily project with a local developer for a 1,000-unit apartment project. ... Then, in April, we started getting calls from clients we had previously done work for on “dead” projects that they wanted to bring back to life, so to speak. They thought they could secure funding and many of these were permit-ready, so it made sense.

Other clients started coming out of the woodwork, wanting to get something going, so we’ve been very busy. We have doubled our staff in the past six months.
Us: To what do you attribute this turnaround? Does this mean that housing construction is rebounding?

Tom: Construction is rebounding in certain segments, especially multifamily. Single-family is lagging, but multifamily is definitely showing signs of recovery, especially as more financing for developers becomes available.

I think the turnaround boils down to a few factors: Number 1, there is a huge demand for multifamily projects because of the lack of inventory. The Gen Y demographic is just now starting to infiltrate the workplace and as they pick up jobs, they are looking for apartments to rent. Additionally, as the economy starts to recover and people start getting back on their feet, they will be looking to “uncouple” or move out of their temporary living arrangement and back into their own place.

Number 2, construction costs are at an all time low, so now is a good time to build. Number 3, the money that is available is reasonably priced because interest rates are at an all-time low. And number 4, the loans are better structured and becoming more and more available. Also, a lot of development companies are finding new sources of funding in addition to banks, such as private money, pension money, and insurance money.
Our clients know that they need to start now if they’re going to deliver projects in 2012 and 2013.
It appears 2010 was the low point for multifamily construction, and activity will pick up in 2011. As Tom Cox noted, these new projects won't be delivered until 2012 or 2013.

I expect residential investment to make a positive contribution to GDP growth in 2011 for the first time since 2005.

Schedule for Week of December 19th: Happy Holidays