What millennials will do once they marry and have children, a restrictive lending environment, and flat income growth were among the topics discussed at the third annual Butcher Forum, an invitation-only gathering in April of the top executives who represent the multifamily housing industry in the United States.
Held this year in conjunction with the 2016 ULI Spring Meeting in Philadelphia, the forum aims to create an environment for face-to-face conversation and candid exploration of trends in demographics, financing, and policies that affect the multifamily industry. Launched in 2014, the Butcher Forum is endowed by Carolyn and Preston Butcher. Butcher is a ULI trustee and Foundation governor as well as the chairman and chief executive officer of Legacy Partners, a Foster City, California–based real estate investment, development, and property management firm. The forum was divided into major themes, with discussion leaders facilitating the conversation around each topic.
Anticipating Millennials’ Next Move
Kicking off the forum was an analysis and discussion of how long the current demand for rental apartments—which is particularly strong and fueled largely by millennials—will last. One forum participant acknowledged that the current cycle has been an “extraordinarily generous time” and “as good as [he] could remember,” but he and others wondered whether millennials were renting “because they want to or they have to.” Their desire for core urban locations, walkable neighborhoods, and amenity-loaded properties has made millennials a boom to the multifamily rental market.
One participant commented that millennials have delayed marrying and having children, and whether they will continue to rent versus owning, or prefer multifamily to single-family homes remains to be seen.
“When they have kids, there is no question they are going to move,” one participant said. “It’s all been delayed, so we haven’t seen [the outcome] yet.” Several said that walkability, high-quality housing, and good locations—though not necessarily those in the urban core—will continue to matter to millennials as will, increasingly, the quality of schools in desirable neighborhoods. “If you can solve that problem, more will stay,” one participant said. Another factor determining whether millennials remain in downtown neighborhoods is the availability and affordability of two- and three-bedroom units. “They will want to maintain many of the lifestyle elements,” even after having children, one participant said.
Baby boomers, or empty nesters, also are a closely watched segment in the multifamily market. Several participants noted growing demand in their markets from this demographic, yet empty nesters seem to want larger units, and may be more interested in renting either by choice or necessity. “Some may not have as much equity from their home sales to purchase another home; they may have to rent,” said a forum participant. Several discussed the need to create customized social spaces for boomers, who already have their social networks but are looking for unique spaces and amenities within which to entertain family and friends.
A More Restrictive Lending Environment
As the conversation moved to capital markets, participants remarked that construction lending by banks has entered a particularly restrictive era with major spreads in pricing. This is mainly due to new rules governing high-volatility commercial real estate loans. Under pressure from regulators, banks are lending a lower share of the overall project costs and limiting initial loan terms to three years. One participant commented that loan extensions will have more requirements attached, and the ultimate result may be the banks forcing multifamily clients to sell their properties.
Another participant lamented the “lack of transparency” in dealing with banks, while others said that increasingly, nonbank lenders will be sought out for construction financing. “The unregulated side is wide open,” one participant said. A continuing source of debt financing is the government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac, as well as the commercial mortgage–backed securities (CMBS) market. Despite a tighter lending environment, one participant reassured colleagues that “deals are going to get done.”
Following the discussion of financing, a conversation about construction costs ensued, with the discussion leader noting that “costs are increasing, but slower than expected.” The main driver is rising labor costs, specifically “subcontractors putting profit back into their contracts” in this post–Great Recession era. Labor supply and pricing look different depending on the market: one participant noted that in his market, it was difficult to keep workers on a construction site due to multiple, competing projects; in slower markets, “subcontractors are calling general contractors looking for work,” another participant said.
So, is there opportunity to create value and efficiencies through innovations in design? While commodity prices and material costs are trending downward, “designs are getting more complicated,” pushing costs upward, the discussion leader said. Plus, increasingly punitive building codes and local regulations mean it is taking longer to get multifamily product on the market. “The time it takes to build a project takes so much longer” compared with 30 years ago, said one veteran developer.
Income Inequality, Affordable Housing, and Polarized Politics
Some said that a combination of the inability to meet the demand for affordable and workforce housing along with stagnating wages has created a permanent underclass in the United States, pushing the electorate toward extremes on the political spectrum—the populism and nationalism seen in the current U.S. presidential contest, as one participant put it. Market “rents are outpacing income growth,” one participant warned, adding that “income growth is going to be more and more important in our business,” particularly since incomes have been flat.
Rent control and other restrictive policies were cited as barriers to producing more housing, yet the lack of political leadership focused on practical solutions to the housing crisis may be an even bigger problem. “We are nowhere near getting supply near to demand,” as one participant said.
Archana Pyati is a writer on the ULI Strategic Communications team.
