Multifamily Development Factors

The Sterling Grand Island

In spite of there being literally hundreds of thousands of apartments currently under construction across the US, there is a new demand peculating in the Midwest. 

According the this recent REIS article: 

National Apartment Market

The national vacancy rate remained unchanged at 4.2% in the first quarter; asking and effective rents both increased by 0.6%, roughly the same pace as the previous quarter.  

We are expecting a flurry of new buildings to come online in the second and third quarters, as developers schedule openings to take advantage of the strongest leasing periods of the year. This may result in relatively minimal increases in vacancies for the rest of the year, with national vacancies increasing by 60 basis points to end 2015 at 4.8%. That is still insanely tight. There are, as always, different forces at work depending on the market – our first quarter outlook for Houston, for example, actually ended up with a net positive change relative to our previous forecasts. As low energy prices weighed on the metro, several projects were delayed – consequently, less supply growth meant that fundamentals would feel less pressure, since household formation is still expected to be relatively robust.

 

Economic Recovery

While many industries that have moved forward cautiously during the economic recovery period, because things are getting better and demographics are solid, many developers still believe there is great demand for apartments. However, to steer clear of any competition, many of these developers are looking specifically at markets and submarkets that have not experience new construction to keep up with new demands.

According to Reis projections, by the end of 2017 approximately 161,000 new apartments will be complete in the US. Consider that only 120,000 new, non-government apartments have been constructed annually during the recession years. Even so, this is substantially less than the bubble of 2015 of 230,000 new apartments completed.

In the next year, there will be approximately 5.5 percent vacant apartments in the United States, 1.5 percent over Reis projections. However, that shows that expansion of multifamily unit vacancies will not be substantial.

In other words, the rate of vacancies in 2017 will not be higher. The reason is because of continuing demand for apartments that will fill a large number of new units built by developers. Instead, there will be a challenge pertaining to supply opposed to demand.

In the Midwest, there has been pockets that have not only survived the recession but thrived. Agriculture prices have helped that significantly but also the conservative fiscal nature of many Midwestern communities have made these markets attractive to developers.

 

Positive Demographics

Experts agree that unless there is some major and unforeseen hiccup, the apartment business should continue to thrive, possibly pushing demand even higher than what is currently seen. Just as some developers will experience success by facing competition head-on, there will be some that do well by avoiding direct competition and building in secondary markets and/or different demographics.

Most of the planned multifamily developments slated for 2017 will be high-end. In fact, the trend is a lot of the apartments built in major central business districts like downtown Omaha, something that is a huge attraction to millennials. For a long time, people preferred suburban living but in the past several years, there has been a significant shift to urban life.

The Future of Multifamily Development in the Midwest

Because I have the unique good fortune to work with developers, land acquisition, and multifamily managers, there are people who ask me "What do I see in the future for multifamily developments in and around Omaha?" 

• More and more NuStyle type developments in tired, downtown buildings. 
• Watching Dave Paladino's mini apartments concept slated for development in downtown Omaha.  
• How long will the "downtown as your living room" work with the Millennials?
• Larger towns, like a Grand Island, that have not seen new apartments, sometimes for decades, will be the recipient of developer competition for new apartments with urban style amenities. 
• The new push will drive existing management companies and other vendors into new markets to the benefit of these communities that have thrived during the recession. 
•  And - as the Millennials grow up and Boomers slow down, changes to keep up with their demands.

Jerry Slusky