by Sunny Sajnani, Senior Director
From 1997 to 2006, national multifamily housing construction averaged approximately 342,000 new units per year, but plunged by 66 percent to only 112,000 units in 2010. Although some real estate professionals predict there will be a multifamily building boom in the near future to accommodate a rising population and housing demands, there are several factors evolving that no such boom will occur in 2011 and 2012 on a national level:
- Population growth is directly correlated with economic conditions. Americans simply have more babies when the times are good! According to the recent U.S. Census, the total year-over-year growth of the American population from 2000 to 2001 was approximately 3.0 million, but fell to 2.5 million from 2002 to 2003, a drop of 17 percent directly related to the stock market crash of 2000. Population growth steadily rose back to 3.0 million from 2006 to 2007—the height of the housing boom. Annual population growth dropped 57 percent to 1.3 million from 2009 to 2010 in response to the deep recession.
- Banks and other capital providers have substantially reduced their willingness to make construction loans and development equity investments. Many capital sources have simply too many bad real estate investments on their books. Many developers flocked to the construction lending programs offered by HUD but even those programs cut back on allocation by raising equity requirements.
- The large number of foreclosures likely to occur in 2011 and 2012 has also kept development capital in check. Approximately 1.2 million foreclosed housing units came onto the sale market in both 2009 and 2010. These foreclosed units are competing with rental product in most markets. This unanticipated rise in the rental housing stock will deter developers and lenders from investing in new multifamily developments.
- Finally, persons ages 25 to 44 (the primary source of renters) will not increase nearly as fast from 2010 to 2015 as will the number of people 65 and older. Most people over the age of 65 already own homes and will be looking to sell and/or rent to people in the 25 to 44 age bracket—further diminishing the demand for new rental accommodations.
The Dallas / Fort Worth Metroplex, on the other hand, has defied the national trends. According to multifamily analyst MPF Research, rents are rising and vacancy rates have been declining, causing apartment developers to ramp up construction in North Texas. More than 3,200 units have been started in the past six months. A total of 8,000 to 10,000 units are projected to start in D/FW in 2011. MPF Research had previously forecasted 5,000 to 7,000 units in 2011.
During the first quarter of 2011, apartment owners leased a positive absorption of 1,750 units in the D/FW area, diminishing the overall vacancy to 9 percent. Vacancy rates are 5 percent or less in newer apartments in suburban markets such as Las Colinas, Plano and Frisco.
Financing sources, including banks, life insurance companies, pension funds and even some apartment REITS, are once again providing debt and equity capital for new apartment developments in North Texas—albeit on a much smaller scale. Most of the new developments that have started in the past six months have fewer units than in previous years when huge 500+ unit projects were the norm. As these smaller developments prove to be successful, capital sources will begin approving the larger developments that were being delivered in the height of the market. North Texas still has some catching up to do from its peak as almost 18,000 units opened in 2009; but the good news is, the development cycle in D/FW for multifamily has begun, defying the broader national trend.
Want to learn more about this? Feel free to contact Sunny Sajnani, Senior Director.