Markets throughout the country continue to be affected by housing shortages. These shortages have been caused by a combination of increased household formation during thepost-recession economic expansion, and constraints that include rising construction costs, high land prices, scarcity of land, anti-development regulations and legislation, and a ‘not in my backyard’ sentiment, or NIMBYism.
Interestingly, the housing shortage has had some beneficial effects on the multifamily market. The sector has also faced new challenges along the way.
Single-family housing inventory is so low in many markets that prices continue to rise. While interest rates remain at historically low levels, home sales have been dampened by the low inventory, and the increased competition for homes among interested buyers has also contributed to higher prices. Increasingly high home prices have created an ever-widening affordability gap that has channeled many would-be buyers into budget-friendly apartment living instead.
Demand and Supply Constraints
As more people move into apartment communities, demand for apartments has never been greater. The rate at which new units are rented (a.k.a. the absorption rate) reached its highest level in three years at the end of 2018, the U.S. Census reports, and apartment construction hit a 20-year high in 2017.
Also contributing to this demand is the fact that millennials have favored a lifestyle conducive to renting over buying, and many baby boomers are downsizing from single-family homes into apartments as well.
These trends have been good for multifamily investors, who do not have to worry as much about vacant units, and for developers, whose product is in high demand.
However, the constraints against multifamily development have left many apartment owners and developers scratching their heads as to how to make much-needed workforce apartments pencil. Rising construction costs and land prices have led to the development of adisproportionate number of luxury apartment communities because they garner rental incomes that justify the spend. Meanwhile, residents in high-barrier-to-entry markets struggle to find units they can afford.
One solution to this problem is multifamily redevelopment, which Trion specializes in. Renovating existing older properties into modern apartment communities—complete with attractive amenities— that a wider base of potential tenants can afford helps augment the stock of appealing rental options. It is also faster and less costly to renovate apartment buildings than to complete ground-up construction, and the regulatory environment is much friendlier to this type of development.
In addition, redevelopment and strong property management can stabilize older propertiesthat may be underperforming and produce consistent returns for investors.
Another solution to this challenge is adaptive reuse. Many multifamily developers are utilizing this method to breathe new life into obsolete buildings, transforming them into cash-flow-generating residential and mixed-use properties—and another investment opportunity for investors. Adaptive reuse can also revitalize neighborhoods and boost their economies, encouraging additional development that benefits surrounding communities.
While the lack of middle-class housing is an ongoing national issue that is not going to be resolved completely anytime soon, innovative solutions continue emerge from the multifamily and affordable housing investment communities, as well as local municipalities, to help alleviate the housing shortage. These solutions have also spurred new investment opportunities for investors and developers within the sector.