List Research By Multifamily Executive Magazine

FOR SURE, THE MULTIFAMILY market has seen better days. With the exception of a few surprisingly strong markets such as Los Angeles, Manhattan, and Philadelphia, national vacancy rates were on the upswing in 2003, while rental rates remained flat. Yet, multifamily builders kept—and keep—building, increasingly so, even in some areas where demand has been lackluster, pushing up housing starts for properties with five or more units by 2.17 percent in 2003. A long-anticipated rebound in the job market, the inevitable increase in interest rates, and anticipated demographic changes in the long run are expected to support continued multifamily starts in 2004, despite an impending glut in many geographic markets. “Nationally, rental vacancies are at record levels,” says Michael Carliner, an economist at the NAHB. “Ultimately, the demand may be there, but in the short term, there are places where property owners will have to make concessions, and it may take a while to fill up these spaces.”

Reasons To Build

On the surface, there seems to be no rhyme or reason to the notion of extensive building during a time when record numbers of people are buying single-family homes due to favorably low interest rates. But even in geographic markets where rental demand has taken a hit—like Dallas, where vacancy rates have reached a 10-year high—builders say there are often still regional submarkets that have escaped the onslaught of high vacancy rates.

Trained multifamily eyes also look beyond the current demand challenge. “All of us in the industry have read the demographic forecast, and we see the echo boomers coming out of the school system in the next few years,” explains Tom Bozzuto, president and CEO of The Bozzuto Group in Greenbelt, Md. “So we're all building now on the belief that these people will be renting apartments from us three or four or five years from now.” Of course, Bozzuto has been lucky—his challenges are limited to a handful of struggling submarkets within the company's otherwise thriving core Mid-Atlantic market, which produced 2,144 multifamily starts for The Bozzuto Group in 2003.

Plus, those same low interest rates that have catapulted millions of Americans into purchasing single-family homes also have made it easier for developers to secure funds for building multifamily properties. “With interest rates as low as they are,” Bozzuto says, “there is a tremendous amount of capital available and interest in being invested in the apartment industry, because on a leveraged basis, the returns to that equity continue to be relatively attractive when you compare it to alternative investment opportunities.”

Military housing developers have also stayed busy, despite the upcoming third national round of military base closings, expected to be released this spring for 2005. At the same time, the Military Housing Privatization Initiative (a federal program enacted in 1996 to address the dearth of available housing and to redevelop existing downtrodden housing at military installations) continues to open up new opportunities for military multifamily builders. So, companies like GMH Associates, a Newtown Square, Pa.–based real estate company that develops military housing through its GMH military housing division, hasn't let impending unidentified closures slow its pace. “We have won quite a few deals, and most of our housing starts are east of the Mississippi,” notes Chris Williams, GMH's senior vice president of project management. Last year, the company secured a significant number of military family housing privatization projects, including the Fort Stewart-Hunter Army Airfield base in Fort Stewart, Ga., where the company will build 1,800 new units.

In terms of regional activity, last year belonged to the South, where builders started some 152,200 units, compared with approximately 46,800 in the Northeast, which was the lowest-performing region in terms of multifamily starts. One of those Southern builders is Columbus, Ga.–based Flournoy Development Co., which began 58 projects in the South last year, predominantly in suburban markets. “More urban and less suburban, that's the trend that magazines write about,” says Flournoy vice president Brady Blair. “But I still think the vast majority of the multifamily deals that are done are in the suburbs, and that's typically where we've been doing our deals.”

Even for those developers who misjudged the demand for rental properties, there has been some relief in the form of conversions to condominiums. “Condominiums and subsidized housing are not as oversupplied as market-rate rentals,” Carliner notes. In areas such as Dallas/Fort Worth, where vacancy rates are at an uncomfortable 10.9 percent, the conversion trend has been picking up steam over the last several months.

Great Expectations

Multifamily starts are expected to decrease slightly this year, as many markets become threatened with oversupply. But construction will certainly continue in an effort to accommodate what industry insiders expect to be a slow but steady increase in multifamily demand in the long term.

In 2004, anticipated increased job growth coupled with higher interest rates—which will slow single-family home purchases—will cut down on the national vacancy rate, according to Marcus & Millichap Real Estate Investment Brokerage Co.'s 2004 forecast. An increased interest among buyers in condominium properties will keep developers active. “There is more strength in condo production than in rental-rate production,” Carliner says. “Existing condos have been appreciating faster than single-family homes. Condominium production hasn't reflected condominium demand, although that began to change in late 2003.”

Finally, echo boomers, immigration, and aging baby boomers will be a force for developing additional properties over the next few years when the market tightens. “We're looking for a better year with the way things are going,” says Alex G. Spanos of A.G. Spanos Cos. The Stockton, Calif.–based firm develops in 22 states and was undeterred by sluggish occupancy levels in some of its markets last year, starting 4,849 multifamily units. “The markets look excellent,” Spanos says. “Within this year or next year, it can only get better.”

Barbra Murray is a freelance writer based in Washington.

Learn more about markets featured in this article: Hinesville, GA.