ORLANDO – The National Association of Home Builders (NAHB) is projecting a 16 percent increase in multi-family housing starts this year and a 50 percent jump in 2012 . But the 336,000 units developers are expected to produce over the next 24 months still won’t be enough to meet demand.
Between 250,000 to 300,000 units a year are needed to keep supply and demand in check, NAHB chief economist David Crowe said at the group’s annual convention in Orlando yesterday.
“We’ve got to get back on track,” Crowe told reporters during a press briefing. “We still have hopes of answering the demand because we’re way behind on household formations. We’re 1 to 2 million households under where we should be. But when they start bursting forward, we’re going to need apartments because that’s were they typically move.”
But there’s a real question whether developers can get back on track any time soon. The problem? Like their counterparts in the single-family sector, apartment builders are hampered by a severe lack of capital..
Developers like the Avalon Bay Company “would love to build more,” said William McLaughlin, an executive vice president with the Washington-based real estate investment trust. “We see a number of years ahead of us in which there will be a real disconnect between supply and demand.”
Avalon, a publically-traded company, has little trouble obtaining the money it needs from Wall Street. But that’s not necessarily the case for private development firms like Boca Raton, Fla.- based Wood Partners or companies such as Michaels Development of Marlton, N.J., which develops affordable rentals.
Even though Woods is 51 percent institutionally owned, it still operates like an old-school builder that looks to traditional sources of capital. And according to Jay Jacobson, the company’s national partner for acquisition and development, national money-center banks have yet to return to the market. Consequently, Woods is using smaller regional and local banks.
Jacobson said insurance companies are coming back to the multi-family sector “in a major way,” but Fannie Mae and Freddie Mac, traditionally big suppliers of acquisition funding, are largely missing in action.
“The money is there for certain participants – public companies, hybrids and large private builders,” the Wood executive told reporters. “But for the traditional small regional developer who builds one or two projects a year; I don’t know how those guys are surviving.”
Michaels, a company which relies almost entirely on low-income housing tax credit financing to build apartments that are affordable to renters who earn 30-50% of the area median, has stayed alive by being innovative, according to its president, Robert Greer.
To replace tax credit syndicators which also have left the market, the company created its own syndication division to sell the credits to local banks that need to satisfy their CRA obligations, Greer said. And it has “started working with national banks on a much greater scale,” Greer said.
“We have great support (for affordable apartment projects) within our communities and neighborhoods,” he said. “But the problem is getting financing.”
The “severe lack of capital” is already causing rents to rise, said Sharon Dworkin-Bell, NAHB’s senior vice president for multi-family and 50-plus housing. “Although we’re building more apartments, it is not enough and there is likely to be a shortage in the next few years.”
Avalon, which owns projects in “supply-constrained” coastal markets, both east and west, is already raising rents. “In my world, rents are already increasing,” said McLaughlin.
Jacobson, a 25-year apartment industry executive, said he’s “never in my career seen so much pent up demand” for multi-family units. “There’s a huge population in the pure rental cohort aged 18-24 coming up, a huge supply of end users,” he said.
Everywhere Woods builds, properties are “leasing up faster than projected. And in some places, rents are rising 7-8 percent a year. Even in Miami, which is seen by many as a poster child for a troubled housing sector, projects are 98 percent occupied with waiting lists” Jacobson said.
Demand is especially insatiable for affordable rentals, according to Greer of Michaels Development. “For every 100 units we build, we get 800 applications, no matter where the project is located,” he said. “Demand is far beyond our ability to produce.”
