Oversaturation in Multi-Family Developments?

Multi-family developments have seen a large surge that has not been seen in many decades. The demand for these types of developments has significantly grown, from the producers sides to the consumers side as well. John Levy, creator of John B. Levy & Co., a real estate investment banking company, was recently interviewed on popular Bloomberg Radio show, Bloomberg Surveillance (Listen below). There Levy and the host discussed the current multi-family housing development market and how it has changed throughout the years and their vision on how it will change in the future.

 

Levy stated that multi-family developments, such as apartments or townhouses, are known as the “darlings of the business” in the industry. With its popularity, the building of multi-family homes is at its highest in 42 years. There are over 550,000 being built around the country, the most since 1974, with about 50,000 units in New York, about 14,000 in Miami, about 45,000 between Houston and Dallas, and 16,000 in the DC suburbs alone. However, with it’s slow yet rapid increase comes fear of oversaturation on the market. In that case, there are more multi-family homes being built than are being rented, therefore they begin to lose value. That would leave many empty multi-family homes sitting empty. While apartment values last year were up 12%, this year, after a couple of months the values are only up two percent, which is causing some rents to soften.

Converted_file_79e51c1e Credit: Tectonic Photo

With the slight decline in growth these last few months, if the trend continues it may become more difficult to finance these multi-family developments, as the biggest financial provider for these homes are commercial banks, with up to 40% of the overall capital. Nevertheless, these loan companies, such as Fannie-May and Freddie Mac, are leading a big push to continue creating these developments, investing 50% more money in multi-family homes than the entire insurance industry is putting in all property types.

Converted_file_ccdb7881 Credit: Tectonic Photo

The driving force in this growth are millennials. The millennial generation has increasingly chosen to rent apartments instead of purchasing or renting single houses. Thus, companies are choosing to create these types of homes as a way to attract millennials. Forbes writer, Bill Conerly, recently stated, “My Silicon Valley son just moved into central San Francisco, so that he can walk to restaurants, coffee shops and bars. I hear similar stories from many other young people, so maybe there’s something to this urban trend.” However, many feel that once millennials begin wanting to start families, the change from urban to suburban living will occur. “I’m always skeptical of these big changes which supposedly mark a fundamental change in human character. When the current crop of young adults get married and has kids, and the kids grow beyond toddling to full-blown running, I suspect that the young parents will start looking for a house,” said Conerly.

However, there are others who believe that the growth of multi-family housing will continue for many years. Real estate professional Justin Alanis, stated in an article on Apartment Management Magazine that, “The rental culture is changing and not just in real estate. Younger generations are embracing renting. The multifamily market (both on the construction side and rental side) isn’t going away anytime soon.”

Multifamily Credit: Forbes (Trends in growth of multi-family and young adult population)

 

Author’s Take: While many see this as an anomaly that only occurs every few decades, I believe that the shift from people living in multi-family houses, as opposed to single-family homes, will continue on. Not to say I am an expert, but I view this shift as a long term mindset of young people as oppose to a short term mindset that so many think they will have once they get older. While there will be small downwards trends eventually, I believe that the growth will stay constant. Millennials have a different ethos when it comes to how to live. They like closer, compact places as opposed to larger, more spread out spaces. As Conerly stated above in the Forbes article,  his son preferred walking to places instead of taking a car.

For a more localized opinion about the topic, we asked Kamran Mirza, broker at a local boutique real estate brokerage in downtown Jersey City  his thoughts on the matter. He stated,” Jersey City is going through an immense multi-family boom with 19,000 units under construction. Even though the housing market will start heading towards a slowdown, the shift of buying trends by the millennials will continue to create more demand for the condo and multi family market.” He continued to offer a new perspective, “We are seeing a change in the way the new generation thinks, they do not want a single family home, they want amenity filled condos. This is a industry broad change, shifting our mentality into a more service oriented society”

 

 

External Links:

Hollwich & Kushner

Tectonic Photo

Apartment Management Magazine

Forbes

Featured Image Credit: Hollwich & Kushner Official Website

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