“When you look at the demand side of the equation, especially from the echo boom generation, we still have a couple million [people] in pent-up demand either living at home or with roommates.” Ric Campo, CEO, Camden
“The baby boomers are thinking more about urban living,” Campo says. “It may not be a downtown in an urban node, but in an area with high concentrations of jobs and a town center.” AVB is specifically courting this group with its AvalonBay Signature Collection, which features higher finish amenities and service levels. “The older renter has been neglected and I think there’s a bit of an opportunity there,” says AVB’s Birenbaum. “Some of those people don’t want the hassle of home ownership.”
A Lot of Catching Up to Do
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Magnetic Markets 0 Five years ago, Miami, Phoenix, and 2000 2002 Las Vegas represented ground zero in the housing meltdown. And at Source: U.S. Census Bureau times, it felt like a generation might pass before anyone broke ground on new apartments in these markets. “People have been scared to get in some of these [bubble] markets,” says Jay Denton, vice president of research at Axiometrics. But all of that’s changing. Campo has a formula for measuring demand in his markets: He’s looking for a ratio of five jobs for every unit. Only three markets fall below the five-to-one threshold: Washington (4.5 to one), Austin (four to one), and Raleigh (3.5 to one). Former bubble markets Phoenix (14 to one), Las Vegas (13 to one), and Orange County, Calif. (10 to one) reveal the widest gaps. While these formerly distressed markets present opportunity, some market analysts and developers have a hard time identifying a “sexy six” market they like because there are so many other promising secondary markets. However, a number of markets, including Atlanta, Austin, Dallas, Denver, Houston, Seattle, and Washington, D.C., have seen starts pile up since the recession. While most of these areas don’t seem to scare developers completely, some are beginning to alter their strategies in these markets. The prime post-recession sites have been gobbled up—leading some to look out in the burbs for growth. “In Houston, supply was concentrated,” Denton says. “You look in the suburbs, there’s not that much development going on and the suburbs have had some pretty phenomenal growth. Denver is fantastic overall, but, if you look downtown where new product is being delivered, it’s softer.
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Source: U.S. Census Bureau
“This year the suburban markets will have the best effective rent growth,” adds Denton. “That’s probably going to attract more development.” But Bob Faith, founder and CEO of Charleston, S.C.-based Greystar (the nation’s 28th largest owner) doesn’t see a major change in strategy for most builders: City centers are the place to be. “Renters want to be closer to public transit, jobs, and entertainment,” he says. “The suburbs have been severely underserved, but the demand drivers will keep us focused on infill locations. That’s where people want to live.”
Pressure Points In a surefire sign of optimism, some of the industry’s biggest developers plan to increase their volume in 2014. Mill Creek Residential plans to jump from 4,500 units in 2013 to 5,400, while Ken Valach, CEO of Dallas-based Trammell Crow Residential, expects his company to jump from 3,500 starts in 2013 to 5,000 in 2014. For its part, AVB plans to start 4,500 units in 2014, after 3,700 starts in 2013. “Generally speaking, there’s a healthy spread between asset values and replacement costs,” AVB’s Birenbaum says. “We still see strong margins in our development platform.” But others will begin to slow down. AMLI started 5,200 units in 2013, but that number will fall to 4,100 units in 2014 and likely less going forward. Like many developers, AMLI is getting hit with higher construction costs, making it hard for deals to pencil out. APRIL 2014 | NMHC 50
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