Mountain States Appraisal's Moe Therrien presented the following update at the 2018 IREM (Institute of Real Estate Management) Multi-Family Housing Luncheon utilizing information compiled by Valbridge Property Advisors. Occupancy remains very high while vacancy rates continue to fall. With the tremendous growth we are seeing and record numbers of new residents, this is a trend that promises to continue.
The NMHC, in partnership with the National Apartment Association, recently launched the Vision 2030 campaign. This new educational and public relations effort focuses on the strong and growing demand for apartments from now through 2030.
One of the program’s foundational pieces is a new research report, produced by Hoyt Advisory Services, that offers a serious, academic examination of the factors that will drive the sustained demand for apartments over the next 13 years.
Here’s the upshot: We’ll have to build 4.6 million new apartments between now and the end of 2030 to keep up with growing apartment demand—or risk exacerbating today’s existing housing shortage.
That means delivering an average of 325,000 net new units each year, after accounting for the estimated 125,000 units or so we lose every year to old age and obsolescence. For comparison, the industry has averaged just 225,000 completions per year over the past five years, which have been some of the most robust many of us have seen in our careers.
Increasing production in step with estimated demand is a giant challenge. While there will be jurisdictions that will be more accommodative of the kind of growth and development needed, there will be others where this will be hard to achieve.
Barriers to Construction
As part of our research, we also released the Barriers to Apartment Construction Index for 50 metro areas. Taking into consideration local regulations, available land, and other factors, this new tool scores the metro areas by difficulty of building new apartments.
The index ranges from 19.5 in the most-difficult market in which to add apartments (Honolulu) to -5.9 in the easiest (New Orleans). Any score above the median of 1.8 means it’s harder to add new apartments in a specific metro compared with other metros.
But it isn’t just the labyrinth of local regulations and policies (such as land-use restrictions, zoning laws, entitlement processes, fees, and so on) that stymie the production of apartments. Just as problematic can be NIMBY opposition. These antigrowth proponents can be vocal and aggressive in blocking development and redevelopment if they feel new development threatens their way of life.
And the NIMBY pressure can be intense. Even well-intentioned policymakers, including mayors, city council members, and the like, often retreat from sensible plans to make their jurisdictions more livable and attractive to new businesses and workers because the level of NIMBY noise is overwhelming.
Ironically, once a new apartment community manages to make it through the often excruciating approval process, frequently these same antigrowth zealots are among the first to line up for apartments for their children. While they oppose affordable housing for their communities’ vital workers—teachers, first responders, health-care workers, retail and restaurant employees—they also hypocritically want their children to have access to apartments that are both affordably priced and reasonably close to home.
This exclusionary mind-set, which some go so far as to call “dream hoarding,” is detrimental not only to housing affordability, but also to communities’ fundamental social and economic health. In fact, it has already crippled many cities across the U.S., most notably in California, where NIMBYism has successfully created a huge disparity between the supply of and demand for affordable rental housing.
Partners for More Production
But even in localities where harmony exists between apartment developers and local residents, the magnitude and complexity of the challenge of meeting the upcoming demand for apartments is still too big for the private sector to take on by itself. We need the local, state, and federal governments to be our partners in meeting the growing apartment need.
To provide a starting point for discussion and collaboration, we’ve also published the Vision 2030 report, which presents a toolbox of approaches that states and localities can use to address the apartment shortage and help reduce the cost of housing. The toolbox presents four broad strategies:
(1) Adopt public policies and programs locally to make housing affordability more feasible. From “by-right” development and expedited approvals to reduced parking requirements and density bonuses, there are a number of policies and best practices that can help keep apartment development costs down.
(2) Increase public–private partnerships. Policymakers can provide incentives such as tax abatements or share risk with the private sector to produce the necessary units at price points households can afford.
(3) Leverage state-level authority to overcome obstacles to apartment construction. Sometimes this difficult process needs a boost, so some states, including Massachusetts, Rhode Island, and Oregon, have begun stepping in to override local zoning restrictions that inhibit apartment construction.
(4) Collaborate with business and community leaders to champion apartments. Without a diversity of housing options to meet a variety of lifestyle needs and price points, local economies will suffer. Local employers and community leaders need to be engaged to create a powerful force against NIMBYism.
Cities and communities that embrace this more-collaborative, we-all-win-together mentality will be the most successful in creating an environment where we can build enough new apartments to meet the need going forward. The repercussions of inaction on this front are great; if nothing is done, housing affordability constraints will continue to hold back our local, state, and national economies. A healthy housing market is critical for attracting both new businesses and new workers to communities.
For more information on this campaign, as well as access to apartment data by state, 50 metro areas, or congressional district, please visit www.WeAreApartments.org. The site also features the NMHC’s Apartment Community Estimator, an online calculator that values the economic impact of building and operating apartments in local communities, and printable fact sheets for your next meeting with local officials or state or federal lawmakers.
At the outset of 2017, most industry concerns surrounded a multifamily slowdown. Indices were falling, construction financing was becoming harder to obtain and many feared occupancy rates would drop nationwide as supply finally began to catch up with demand.
Those concerns continue to exist six months later, but the first half of the year wasn’t exactly doom and gloom.
Our State of Apartment Demand blog published earlier this year referenced the unsettling findings of the National Multifamily Housing Council’s Quarterly Survey conducted in Oct. 2016. The survey showed slowing across all four indices (market tightness, sales volume, equity financing and debt financing).
The trend for those indices hasn’t reversed, but it isn’t dropping any further. In fact, NMHC’s April Quarterly Survey showed modest growth among all four indices, although all remained below the breakeven point of 50. In short, the moderate improvements symbolize more of a plateau than a decline.
NMHC’s chief economist Mark Obrinsky said supply has remained in line with demand in Class A urban core markets, which has led owner/operators to increase concessions to spur lease activity. Even so, occupancy rates have remained at historic levels.
Another hint of a plateau was provided in April, when average nationwide rents grew only $3 to $1,314. In addition, the year-over-year rent growth from April 2016 was 2 percent, which accounted for the smallest growth since April 2011 (1.5 percent).
Other compelling industry trends at the midway point of 2017 include:
Multifamily construction loans are harder to find: Construction loans are not impossible to find, but banks have begun to be more deliberate about when and to whom they’ll offer a loan. And when banks do lend, it’s not always for the full amount of the development. While projects involving popular large developers continue to have few problems finding funding, midlevel and smaller developers are being met with more stringent loan restrictions.
Federal Reserve believes economy is strong, raises rates: For the second time in 2017, the Federal Reserve raised rates on June 15. The rise (25 basis points, to the range of 1 to 1.25 percent) reaffirms the Fed’s belief that the economy is strong enough for money to be more expansive – including real estate financing. Fed Chair Janet Yellen said the stabilization of the labor force participation rate signals a stronger job market, which helped lead to the unanimous vote to raise rates.
Amenity races ramp up: Possibly in response to the plateauing market, apartment communities have been raising the bar with regard to amenities. In a concerted effort to opt for usability and functionality, convenience-rooted amenities such as package lockers and bike storage facilities are among those being added to existing communities and also incorporated into the blueprint of new developments. Student housing developments in small spaces are especially aware of this trend.
In summary, while the apartment market might be weaker than it has been over the last few years, rents and occupancy rates remain healthy. Modest growth has been seen among major indices, and supply has remained in line with demand in certain markets. Overall, apartment operators who continue to market intelligently may not experience a drop-off of any sort based on the current trends. We will continue to watch the state of the industry and will provide another update in the next few months.
Commercial Northwest believes in investing in the community around us to build a stronger tomorrow. Each year we partner with Keller William’s Red Day and spend a day in the community (and away from the office) to serve worthwhile organizations and causes. This year we partnered with NeighborWorks Boise to help stain a fence at a new pocket neighborhood on the Boise Bench.
In 2009, Keller Williams introduced Red Day. This is a day dedicated to the year-round service initiative that Keller Williams puts into improving local communities. RED Day stands for Renew, Energize and Donate and is celebrated on the second Thursday in May each year. Projects range from rebuilding homes, refurbishing parks, donating to food shelters, hosting blood drives and so much more. Each project is selected based on the individual market and the need within each community. As Mark Ozman, an associate with the Indianapolis/Carmel Market Center, wrote:
“RED Day isn’t about cleaning up a park. It is a one-day expression of what happens 24/7 in the Keller Williams culture. It is seeing a need, discovering who can meet that need and then getting it done."
On May 11th Commercial Northwest and the Nancy Lemas Keller Williams Commercial team partnered with local company, NeighborWorks Boise to help stain a fence at a new pocket neighborhood. These pocket neighborhoods are designed with anywhere between 10 to 25 single family homes that are more compact for a close-knit community feeling. Neighborworks is a private non-profit organization (501(c)3) that helps home buyers purchase a home based on efficiency and reduced costs of living. They also provide grants for qualified first-time buyers, optional one-on-one pre-purchase financial counseling and home buyer education classes.
Volunteers from across the Keller Williams family met early in the morning at the future home of what Neighborworks is calling the Ormond Street Cottages, located off of Vista Ave in Boise. In total, about 30 volunteers helped stain the fence around this future community. For more information on this community and availability visit the NeighborWorks page here.
For those feeling the Red Day spirit, you don’t have to wait until next year in May to give where you live. NeighborWorks also sponsors Rake Up Boise in the fall. There is no shortage of community involvement in Boise and there are lots of worthwhile organizations working to continue to make the Treasure Valley the best place to live!
Tenant demand remains strong as home ownership declines. Property owners and investors should feel confident with asset performance. Among key demographic and economic drivers, job creation and household formation during 2017 translated again into positive net absorption of units. In 2017, projected job creation and rental household formation will support demand, while favorable demographic trends will also translate to low vacancy rates and steady rental increases.
The entrance of Millennials into the workforce remains a potent force in the multifamily sector as these individuals have a high tendency to rent. Nationally, the home ownership rate descended to a 51-year low of 62.9% last year and is projected to remain in the low 60% band in 2017. The low rate is not altogether surprising given the Millennial's desire to remain mobile as well as their burdensome student debt. In addition, a cultural trend towards later marriage and family formation should translate into sustained demand for rentals and extend for the next 10 years in apartments.
A peak in construction is expected in 2017. Issuing of permits has been leveled off as construction lenders are exercising discretion and critically assessing the experience of development teams. In addition to conservative permit proposals, construction employment in Boise rose 7 percent between March 2015 and March 2016, from 19,000 jobs to 20,300. The increase in apartment construction this year coincides with growth trends. Completions of luxury rentals will exert more pressure on the class A vacancy rate in 2017, while performance of Class B and Class C assets will encourage further reconsideration of investment strategies.
Some newer assets will benefit from strategic locations in nice neighborhoods While others will face competition from a wave of development. In Boise, although we are facing significant apartment additions, we also have a captive renter pool as home prices are elevated. Even with the addition of over 3,000 units to our market in 2017, the vacancy rate in the Treasure Valley has hovered between 2 and 3.5 percent for four years, according to Mountain States Appraisals in Boise. While the vacancy rate hovers below market equilibrium, it has given property managers the opportunity to increase rental rates. This is promising news for both owners and managers for the last half of 2017.
With the cost of living on a steady incline and the demand for rental housing being pushed to an all-time high, it is inevitable that landlords will need to increase rents to keep up with market trends. This is great news for owners as increased rents equals more income and can mean an increase in property value. There are factors to take into consideration when increasing rent on a tenant. If done correctly, you will limit high turnover and keep vacancy rates low.
Before increasing rents, evaluate your local laws to ensure that raising rent is an option. Some areas with rent control may not allow such an option. Other areas may only allow a specific percentage increase. It is important to establish that you are compliant with all federal Fair Housing laws as well. This means not raising rent in any discriminatory manner. If you’re unsure of your local and state laws here is a great resource.
Inspect the leases in your portfolio. Since you cannot raise rent on a tenant who is currently in a lease, look for leases that are going to expire so that rent can be raised after the expiration. Having a report with lease every expiration is the foundation of successfully increasing rates. Having too many leases expire in any given month can hinder your ability to raise rents without taking a vacancy loss.
If you are unsure of current market rates for your area, start by shopping the competition. Talk to local property managers in your area and find out how strong the market is. Call a couple properties and ask for a quick market survey to research what similar units are renting for.
Once you have completed market research, observed your lease terms, and confirmed compliance with federal and local laws the next step is to inform the tenant. The most professional way to start is to send a written renewal notice within 30-90 days (depending on what your state requires). Using a form letter that is already prepared can save you time and keep things organized.
This is a terrific opportunity to communicate with your tenant about any maintenance needs that the tenant may have forgotten to inform you about. You can offer incentives to the resident to resign a lease by offering a basic carpeting cleaning or small upgrades to the unit. Not every resident is going to be happy about an increase in their rent. Making it more palatable to tenants by including a benefit to the tenant will encourage them to resign a lease.
Small raises with each lease renewal is a much easier process than a substantial increase all at once. This is the best practice to soften the process for the residents and ensure you keep vacancies low.
The process of raising rent can be overwhelming to some property managers. Finding a balance between raising rents and keeping both owner and tenant happy is the best way to ensure that everyone is happy. Knowing the best practices for this and staying organized ensure that you are successful.
In the face of moderating job growth…despite the massive amount of supply identified for delivery in 2017…even though several large metros are expected to remain in negative rent-growth territory…Axiometrics apartment market data is resulting in a forecast that shows annual effective rent growth in 2017 matching the long-term average.
The latest forecast estimates average rent growth of 2.3% this year, equaling the average rate from 1995-2016 and actually 10 basis points (bps) higher than the previous forecast’s estimate. This slight increase also comes in the wake of a predicted fall in the job-growth rate to 1.4%, with 2.01 million jobs added to the workforce in 2017.
With the slowing job-growth rate and with 404,761 new units identified for 2017 delivery, as of April 3, 2017, average rent growth remaining at the long-term average is a testament to the overall health of the national apartment market. While primary markets such as the San Francisco Bay Area, Houston and New York are expected to average flat to negative rent growth this year, strong smaller markets are taking up some of the slack, according to Axiometrics apartment data.
The scatterplot chart below depicts how the apartment market has changed in the past year. The green dots indicate markets in which the forecasted 2017 rent growth increased from the prediction of one year earlier; the red dots indicate metros where the forecast has been lowered. Except for Los Angeles, Atlanta and Seattle, the “green” metros are secondary markets that have shown a great deal of strength since the start of 2016 – such as Sacramento; Riverside, CA; Warren, MI; and Minneapolis-St. Paul.
Most of the primary markets are “red” – New York; Boston; Philadelphia; Washington, DC; Chicago; South Florida; Houston; and the Bay Area among them. As the chart shows, the largest positive change was 170 bps (in Sacramento), while the biggest negative change was 460 bps (San Jose). San Francisco, Oakland, Houston, Baltimore and New York also dropped by more than 200 bps.
In terms of the actual forecasted rent growth for Axiometrics’ top 120 markets, based on number of units and other factors, the biggest changes between forecasts came at either end of the scale. The previous forecast estimated that only two metros would achieve average rent growth of 4.0% or higher this year, only one market would be negative and 10 would range from 0-2%. The other 107 would gather in the 2-4% area.
The latest forecast, however, reduced that 2-4% cluster to 80 markets, still two-thirds of the total group. Some 14 markets are now expected to exceed 4.0% rent growth, while a total of 26 metros would fall below 2.0%, including six in negative territory.
As mentioned earlier, supply is a major factor in predicting how the nation and a market will perform, though not to the same extent as job growth. The 400,000-plus units identified for 2017 delivery represent the peak for the current apartment cycle, but the pace of construction won’t really start slowing down until the third quarter of 2018.
Axiometrics forecasts 319,541 units to come to market in 2018, and 295,521 in 2019. The supply levels are expected to tick up slightly in 2020 and 2021, but nowhere near the peaks of 2016 and 2017.
Other predictions for 2017 and beyond, based on Axiometrics’ latest forecast and apartment market research, include:
Investing in rental properties can add to an owner’s monthly cash flow and net worth. The strength of the day-to-day management of your properties has the biggest impact on the future value of your investment. From retaining residents to fielding work order requests, every action your property manager takes impacts your bottom line. Finding the right property management partner, is the crucial component in the long-term success of your portfolio.
With over 100 years combined experience, the team at Commercial Northwest provides excellent customer service for our owners, renters and investors. We currently manage around 850 multifamily units. Our portfolio stretches from Treasure Valley to Twins Falls and Eastern Oregon. Our team members are property owners themselves and understand how decisions can impact an owner’s return. Our very first clients are still our clients today, proving that our level of customer service and experience is worth its weight in gold.
From screening to the final move out, having experienced property managers in your corner can provide you with a list of great benefits; today we will highlight three of those benefits:
1. Protect and Grow
Can you talk about how marketing units before they come available to ensure little vacancy loss protects the owner from loss in rental income. Also, how tracking market rents and doing market surveys ensures that we are always obtaining the highest market rents for our clients. We know that the strength of the properties’s income statement determines the value of the property. Therefore, we take great care in protecting and growing that value.
2. High Quality Renters
Having a thorough screening process in imperative to finding quality renters who pay rent on time, renew their lease and generally put less wear and tear on the unit. Commercial Northwest puts our owners at ease by implementing a proven set of screening criteria that complies with all federal, state and local fair housing and civil rights laws.
3. We Are the Owner Advocate.
The team at Commercial Northwest acts as the point of contact for our owners. That means ensuring rent is collected on time, maintenance issues are handled in a timely, cost efficient manner and resident relations are handled. We work to maintain a positive relationship with current residents. Our aim is that residents renew their residency at our properties; which reduces vacancy loss and turnover expense for our owners.
Peace of mind is important to owners. Knowing the time, effort and resources needed to manage a property, it makes a world of difference to have an experienced property manager to help with the work. Commercial Northwest is the Southwest Idaho leader in Property Management. We have the knowledge, skills and elevated level of customer service that ensures your investment receives the highest quality of management.