Multifamily developers answered the call in 2015 when a lack of housing supply and rising rents characterized many metro markets around the country. Since then more than one million new apartments have been built, the most in 30 years, and as a result, many of these significant metro markets have seen substantial increases in apartment inventory. Nashville, for instance, saw their apartment inventory increase over 30% during this time. Some are wondering if the pendulum has swung the other way with supply now outpacing demand. Lynn Bora, VP of Operations at Winn Companies, recently observed that the result of all these new deliveries, particularly for high-end projects, is that “concessions are back with a vengeance.”
Perhaps Ms. Bora was using a bit of hyperbole, but she is privy to information from the 100,000 units the Winn Companies manages across the country, and there’s no disputing that concessions are on the rise in many major markets. A recent study by RealPage reveals the top 15 markets for lease concessions showed an average rent discount of 7% (or three weeks of free rent) and there are several recognizable names. Many of yesterday’s ‘Top Markets’ have become ‘Top Markets for Lease Concessions.’ Atlanta tops the list and is trailed by Houston, Austin, Dallas, NYC, Chicago, Denver, and Charlotte. Digging further into the RealPage analysis, it appears the most substantial concessions are being offered at new, high-priced luxury projects.
As we look to the current North Texas pipeline, there’s little relief in sight. While nonresidential construction projects fell by 33% in 2018, residential construction dipped only 1%, and this comes off increases of 39% (2015), 27% (2016), and 13% (2017). While the residential construction statistics include single-family projects, the fact remains new residential projects will continue to compete for residents for the foreseeable future. Of the top 20 MSAs in the country, Houston is the only market where demand is outpacing supply according to Ricardo Rivas, CEO of Allied Orion Group. Even here, developers and investors of new projects remain cautious as the effects from Harvey filter out of the market and questions remain about what happens if oil prices fall well below $70 a barrel again.
While it’s important to recognize the headwinds facing new developments, no one is predicting that the sky is falling. Perhaps real estate’s most telling statistic, job growth, is still robust nationally and this is especially true in Texas. Texas State employment has grown at a 3.6% annualized rate in 2018. This growth has been broad-based across the state’s major metros leaving most regional and national analysts to predict a solid 12-18 months of continued solid growth for the multifamily sector.
Still, in addition to concessions, factor in slowing rent growth with more extended lease-up periods and it’s easy to see why many developers and investors are exploring creative exits to their construction loans and other maturing debt. Even for recently stabilized projects, changes in interest rates and questions about when this cycle will end have some sponsors wanting to keep their options open as they steer clear from the heavy prepayment penalties that come with permanent financing. The tried and true agency exit is becoming less of a foregone conclusion, and fortunately, there are plenty of capital providers picking up the slack. Debt funds, banks, and other bridge lenders can offer creative and interesting solutions as new projects compete during these late innings of the cycle. Though there are many capital providers in this space, the challenge is identifying the right fits for a specific project and creating a market so that the sponsors have options. No one wants to have their hand forced because we all know what happens when one side of the table holds all the cards.
The author, Ralph Rader, is a Senior Financial Analyst in the Dallas office of Metropolitan Capital Advisors. Ralph can be reached at firstname.lastname@example.org or 972.267.0600.