In the most recent data from the U.S. Commerce Department, multifamily construction starts were up 29.4 percent month over month in June. Well into the current cycle, multifamily development remains remarkably strong by almost any measure.
More than 30 of the nation’s leading multifamily developers, owners, and capital providers gathered in Houston last May to discuss issues facing the industry at the second annual ULI/Carolyn and Preston Butcher Forum on Multifamily Housing, with four key themes emerging:
Capital. Participants discussed a multifamily cycle that is the strongest in a generation and that shows little signs of slowing. Apartment sales in early 2015 exceeded the pre–Great Recession peak. Last year saw the most rental starts since 1987 (although also the fewest condominium starts since the early 1970s). Buyers are paying record prices, especially for urban high-rise product. A desire to own hard assets in supply-constrained markets is driving low cap rates in the 3 to 4 percent range, as private equity and other sources continue to raise large investment funds.
Demand. Participants discussed distinguishing characteristics of the younger and more affluent millennials: they are more likely than prior generations to decide where they want to live before securing a job and have less attachment to ownership—of homes, cars, consumer goods—than other groups, having come of age in the mobile technology–enabled “sharing economy.” Also noted: African Americans and Hispanics will drive much of future housing demand; and because they have much lower average incomes and net worth than whites, significant pressures for more affordable offerings will emerge.
Development. A major concern is labor costs, which are often exacerbated by a shortage of qualified contractors and requirements to pay prevailing union wages, among other factors. The out-of-pocket costs and time horizons associated with public approvals also are a major and in many markets escalating cost, especially for urban infill and mixed-use projects. According to participants’ experience, modular technologies have generally not delivered on their promise to achieve significant cost savings.
Leadership. Succession planning across the industry is a major challenge, and it needs to be addressed at all levels of the company, not just at the top. One approach is to evaluate all leadership staff on how well they are developing their successors. Culture must be a priority of leadership and emanate from the top, as one participant noted: “The one day you do not work on culture, you’ve got to spend two days fixing it.”