Last week we covered 5 single family developers that entered the multifamily arena. Most of the list had only started in the past 3 years, so it’s a relatively new trend. Right now there are a lot of questions and uncertainty about what these movements mean for multifamily. As Multifamily Executive put it “Whenever a new competitor enters the fray, others are curious. And, if that competitor wins a few deals … well, then, suspicion sets in.” We want to discuss what we found to answer a few of these concerns.

Is this a sign of a lending bubble in Multifamily?

Probably not. Jay Parson, Director of Analytics & Forecasts for MPF Research at RealPage Inc., wrote a great article last year touching on this concern. Parson does not see the rise in multifamily construction to be in the same danger zone single family was experiencing during the bubble of the mid 2000s. Even with the growth in construction of multifamily buildings, it is still below the levels seen during the 1960s – 1980s, not breaking records like single family was before its bubble busted.

“Moreover, the nature of lease terms allows apartment owners to quickly remove delinquent tenants. And apartment prices haven’t shot up to the degree seen in single-family homes in the run-up to the crisis — not yet, anyway. Multifamily housing prices would have to plunge even further than in 2008-2009 before a bank’s investment could become exposed.” – Jay Parson

What’s going to happen when the millennials start buying homes?

We talked a little bit about this in our write up on why millennials will continue to rent.  It’s been established that Millennials aren’t in any hurry to buy. There are more renters, renting for longer in this generation than in any other.

With that being said, one day some millennials will eventually make the decision to buy, but there isn’t going to be a mass exodus to the suburbs due to the trickling effect happening with them. The next step after college graduation isn’t usually buying a home. Many move back in with parents or with roommates after college until they can afford to rent their own place, so there is a steady stream of long term renters.

But the question is what happens once some of those renters get to the age where buying makes sense?  As soon as that percentage goes into buying, Generation Z will be right there to pick up the renting slack. They are on the same track to push establishing a family further down the line and, unfortunately, accumulating record amounts of college debt.

Is this going to result in prices of land going up drastically?

Ready for an answer you won’t like? Truth is we don’t know. Densely populated markets may see a spike in prices, but there is no good way to tell if it is a result of new developers overpaying for sites. It is possible they choose to pay well over worth for a site in order to compensate for their lack of reputation, but it is equally as possible the prices of land in any area are going up because of the popularity.

Toll Brothers said they tend to take a more conservative approach, while Lennar has been accused of overpaying in a number of markets. The mixed signals we get don’t really give us much clarity on the answer. Your guess is as good as ours, so let us know if you have any insights on the answer.

Won’t this take companies a long time?

It is easier not to worry about the effects now, since it will take these other companies a long time to fully make their move in multifamily right? Wrong. One would think taking on a huge endeavor like moving into multifamily development is a 5-8 year plan. Well Lennar and Toll wasted no time.

Toll Brothers has projected six new multifamily buildings to open for occupancy in 2016 with seven more to open by 2018. Lennar’s page shows 20 multifamily properties in the pipeline, adding to their current portfolio of ten apartment developments since their aggressive push into multifamily just two years ago.

The other developers we covered didn’t mention moving as quickly as the two mentioned above, but that doesn’t mean they won’t in the next few years. It could just mean they are holding their cards close to the vest or their movement hasn’t been as highly publicized.

Is this going to lead to an oversupply in top markets?

It’s unlikely to lead to an oversupply in the near future. Even top markets like Houston, Dallas, Denver, and Austin have room for the growth. In fact, according to Forbes all four of those cities are within the top ten of America’s Fastest Growing Cities in 2015. All four cities are also within the top ten for the 2015 Best Cities for Job Growth.

The rent growth in those cities is also topping charts according to Zillow. A larger apartment supply can actually help alleviate the rising rent for renters. This ends up being great for apartments because it keeps renters from saving for down payments on a house, in turn keeping them renting for longer. The consequence is smaller growth in rents. Growing supply gives renters more options, which means they don’t have to stick around an apartment when the rent gets hiked at the end of their lease. Rent growth, as we all know, can’t be sustained forever and will eventually even out or fall.

Hopefully some of these answers provided comfort for those of you in the changing landscape of multifamily. Right now there is plenty of room for a few new developers, but we aren’t being foolishly optimistic. As stated earlier growth can’t last indefinitely, so it might be a good time to make a move into sub or new markets.

If jumping into new markets is something that peaks your interest,  REscour can give you a clear view on any of the 166 markets we cover. If you just want to get a weekly update on CRE news, well we can help you with that too. Check us out at: www.rescour.com

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