WHEN ASKED TO NAME their biggest concerns for the coming year, multifamily builders aren't short on answers. Their lists include everything from zoning and permitting, to rising materials prices, to environmental regulations, to mold and mildew. But the question that's on everyone's mind is when to expect a resurgence in market-rate apartment building. While rising home prices have helped boost demand for apartments, the rental market is still challenged. As a result, builders continue to seek out niche markets, whether that means making tax credit, student, and military housing a bigger part of the mix or building condos rather than for-rent units.

Cross Training The condo market remains strong, at least in some areas, as low interest rates fuel a brisk market for conversions and new construction. For Atlanta-based Lane Co., condo construction has grown from less than 5 percent of its business five years ago to 60 percent today. Jerry Brockman, the company's development director, thinks the factors driving this market go beyond interest rates. “A lot of first-time buyers are looking for the lifestyle benefits the city has to offer, as well as for the tax advantages they get from owning rather than renting,” he says. “A growing number are tired from driving into the city from the suburbs. And when the alternative is a $600,000 single-family home that's ready to fall apart, a more affordably priced new con-do starts to look very attractive.” Because of this, he says the market is more stable than some people think. “I don't think the condo market will fall on its face if interest rates go up,” he says.

SELLER'S MARKET: Last year's total number of multi-family starts dipped just slightly below 2003's level, but with continued low interest rates and high demand for condos, builders shifted significantly toward for-sale, rather than for-rent, units.
Source: U.S. Census Bureau SELLER'S MARKET: Last year's total number of multi-family starts dipped just slightly below 2003's level, but with continued low interest rates and high demand for condos, builders shifted significantly toward for-sale, rather than for-rent, units.

Condos are especially hot in Las Vegas, according to Rondetta Troutman, senior vice president in charge of conventional housing for Warwick, R.I.–based Picerne Real Estate Group, which built more than 4,100 garden apartment units last year in Arizona, Florida, Nevada, and Rhode Island. She estimates there are 11,000 units for condo conversion in the Las Vegas metro area versus 4,000 to 5,000 units in the pipeline for new apartments. “Those high-end developers who would normally be building apartments are now building ground-up condos,” Troutman says.

Rising home prices have also made subsidized housing an attractive niche. “We're seeing a lot of growth in tax credit housing,” says Paul Emrath, assistant staff vice president for housing policy research for the NAHB. This market has been embraced by Simpson Housing Solutions, a Long Beach, Calif.–based subsidiary of Simpson Housing, which started 1,969 units last year.

“We're focused 100 percent on workforce housing,” says company president Michael Costa, referring to housing for households making between 60 percent and 80 percent of the local median income. Many of these are younger people just entering the workforce. “The median home price in Los Angeles County is over $400,000, so these programs appeal to young people. The tax credits let us build two- and three-story garden-style apartments at market-rate quality.”

Market Muscle That's not to say that builders don't see continuing demand for market-rate apartments. But the strength of that demand will be driven by several factors, the most important of which depends on whom you ask. Like a lot of builders, Robert Fleckenstein, president of Summit Contractors, a national builder based in Jacksonville, Fla., is watching interest rates. “A 2 percent increase in interest rates may force new homeowners out of the housing market into rental units.”

Troutman says rising home costs have already made the rental market strong enough that her company doesn't need to provide the concessions it used to. “We're seeing things back at pre-9/11 levels,” she says.

A number of builders say the market-rate projects they are building tend to be large ones. “We're seeing market-rate projects for 200 or more units,” says Fleckenstein, a size he says that is bigger than in past years. Troutman's company is also building bigger projects than in the past, a trend she blames on rising land prices, which have led developers to try to squeeze more units onto each piece of property. “Everything we're building is at least three-story, as opposed to two-story,” she says.

Charles Wardell is a freelance writer based in Vineyard Haven, Mass. Leah Matuson is based in Medfield, Mass.

Learn more about markets featured in this article: Las Vegas, NV.