Millennials & Baby Boomers Driving Multifamily Boom
Nozzle of a concrete pump truck (upper left) pours a foundation at Vantage at Brooks City-Base, a multifamily development being built by Concept Builders that will overlook a scenic wetlands area.
(Posted Jan. 19, 2016 at 1 p.m.)
by Adolfo Pesquera
Supported by Millennials not ready to buy and Baby Boomers done with home ownership headaches, the multifamily construction sector can expect continued robust activity through 2016 and probably beyond.
Virtual Builders Exchange reached out to several contractors and developers experienced in multifamily development to get a read on the health of this housing sector.
Jordan Foster Construction LLC, consistently rated among the top 10 multifamily general contractors in the nation by MultiFamily Executive, has been going full throttle on almost every type of multifamily project, including luxury, mixed-income, affordable and student housing.
JJ Williams, the company’s managing director of business development, estimated that the multifamily sector may be “in the seventh or eighth inning,” nationally, in terms of the current development cycle. But the Texas market is probably in the sixth inning, he added.
“We all know that the cycle will end at some point,” Williams said, “but the end is really not in sight.”
Williams sited two key demographics that are sustaining new construction.
“The trend of Millennials delaying marriage and family has been very high. That is coupled with Baby Boomers downsizing from mansions and McMansions into rental units,” Williams said.
Rather than maintaining a house and yard, both groups prefer to use their disposable income for entertainment or travel, adding, “We’re in the ‘experience generation’ now. The two largest generations in our history are very pro-rent.”
It also helps that Texas has been leading the nation in job growth. Jordan Foster’s Multifamily Division is based in Dallas, and Williams noted that North Texas added 107,000 jobs last years, the most of any metropolitan statistical area in the nation.
Of the five largest Texas markets, four were delivering less apartment units than were being absorbed, according to ALN Apartment Data (see graphic below). Only Houston was showing signs of slowing down, with 11,998 units delivered versus 10,425 units absorbed through October 2015.
Zach Brown, 32, vice president of development and acquisitions for Brass Real Estate Funds in San Antonio, can relate as a developer and a Millennial to the trends that Williams described. He and his wife own a home that they rent out, preferring urban apartment living.
“We’ve probably moved five times in the last six years. We definitely appreciate the flexibility in renting,” Brown said.
A resident in Austin’s Hyde Park neighborhood, Brown prefers being near downtown’s coffee shops and entertainment district. Brown’s day job, however, is building or renovating multifamily properties.
Brass Real Estate invests in the development of or buys existing income-producing properties, typically holding them for five to seven years. Brown is currently working on a 288-unit project in New Braunfels that will go to construction possibly by late summer 2016. The project targets middle income families at market rate prices.
“We’re looking for areas that are growing rapidly and where single family housing has escalated to a point where it’s out of reach for a majority of the population,” Brown said.
New Braunfels has experienced such growth. Newer apartment complexes are going for $1.25 per square foot. That compares to about $1.60 per square foot or more to own, he estimated.
Floorplans and Sustainability
Changes in the design of multifamily projects can vary considerably, depending on who one asks. It also depends on which developer is involved. In Brown’s experience, floorplans have become smaller; bedroom and bathroom counts have dropped.
“I see a larger percentage of one-bedroom and two-bedroom. There used to be a larger percentage of three-bedroom plans,” he said.
Amenities also change, depending on the style of the complex and type market, he said—suburban community versus urban, for example.
“In general, clubhouses are shrinking. Business center-type clubhouses are being reduced in favor of dog parks or more yard with ground level units. Tenants have more options in customizing their experience,” Brown said.
Mark Gross, president at San Antonio-based Concept Builders, takes a different view. Unlike Brass Real Estate—a developer of multifamily and office properties—Concept Builders is a general contractor and builds for several clients. Gross hasn’t seen much change in floorplans, he said.
While Concept Builders regularly does conventionally financed market rate projects, they also do a substantial number of workforce and affordable housing projects. These tend to be mixed-income projects that have some percentage of units being rented at below market rate. This affects where developers decide to invest in things like energy efficient features.
“Typically, the apartment dweller pays the utilities, so were a developer to spend $2 million to put in foam insulation, he’s never going to get his money back. Consequently, most guys in the affordable stuff, they’re just doing what they have to,” Gross said.
When developers do add energy saving features, it often depends on whether there is a government subsidy to defray the cost and on where the savings are realized. Gross recalled a project Concept Builders did in La Feria the Rio Grande Valley, where solar panels were installed on all the carports. But the electricity generated was routed to power lights in the common areas.
“That’s how it benefits the owner. He pays for site lighting, the clubhouse, those types of things,” Gross said. “In multifamily, the developer is just looking for the best possible rate. In general, energy saving features haven’t been a big part of our business.”
However, Gross noted that the apartment sector is more competitive because more people rent. Owners have to provide amenities to make their properties more appealing. Some invest in features like nicer clubhouses, he said, “resort-style pools, dog parks, and a bunch of other stuff we didn’t do 20 years ago.”
Jordan Foster, however, gets a penthouse view of development; the company produces a lot of luxury product and those owners are willing to spend on state-of-the-art upgrades, Williams said.
“We build pretty much anything people are living in. We just completed a 40-story high-rise in Houston, 2929 Weslayan, for PMRG,” Williams said.
Since last summer, Jordan Foster has been constructing Phase II of Residences at La Cantera in San Antonio for USAA Real Estate, Williams added. That is a four-story traditional stick-frame Class A podium wrap (a pre-cast steel and concrete parking lot with resident units wrapped around it to erase the visual of so much concrete). Units will go for more than $2 per square foot and amenities will include three courtyards, a resort style pool and lavish landscaping.
“Construction costs and land costs are at an all-time high, which is driving rents up. So owners partnering with the development group are constantly looking at ways to build a better mouse trap.”
‘E-Urban’ design is a term that, when applied to mid-rise and high-rise multifamily, has as a goal the elimination of long, hotel-style hallways. Those corridors represent around 35 percent of un-rentable space. Some designers have expanded rentable areas to 87 percent of the structure by replacing halls for elevators.
“They’re trying to limit un-rentable square footage. In land-rich suburban markets, you don’t get as creative, so the traditional garden-style residence is still very common. But as you move to downtown, the Millennials certain drive that,” Williams said.
Williams admits there is a fine line between cost a practicality, but sustainability and energy features have a higher priority during design with institutional grade owners, Williams said.
“I mean the big money institutional owners—USAA Real Estate, (Franklin, Tennessee-based) Southern Land Company, (Dallas-based) Huffines Communities. They have a long-term hold strategy. So, sustainability and energy efficiency is not something that’s going away.”
In addition to the return on investment while such properties are in their portfolio, Williams said these features provide for better resale value at the end of the hold cycle.
Tax Credit Financing
The majority of multifamily new construction is conventionally financed and geared toward workforce, student or luxury rates. Tax credit financing is regulated by the state and capped each year, which limits the number of applicants that actually move to the construction phase.
There is a niche group of developers that specialize in tax credit projects. These include Ohio-based The NRP Group and JES Holdings of Columbia, Missouri. Tax credit projects are either for low income families or seniors.
Mark Feaster, a JES Development Co. consultant, noted a major change in senior community projects came out of the 2015 Texas Legislature.
During a recent presentation on a project before the New Braunfels City Commission, Feaster said that prior to last year senior community projects “came out the gate two points behind” low income family projects.
State Representative Carol Alvarado, D-Houston, authored, and Senator Robert Nichols, R-Jacksonville, sponsored a bill that passed into law requiring that senior projects be scored equally.
“Probably 90 percent of what we develop is senior housing. So, we’re really glad that change was made,” Feaster said.
What Feaster did not mention is the reason low-income family projects started with a lead in Texas Department of Housing and Community Affairs scoring. During legislative discussion on House Bill 3311, critics noted that senior community projects politically more feasible.
JES Development’s project in New Braunfels is representative of most senior community tax credit projects. It is age restricted to active adults 62 years of age or older. There is no assisted living component.
Other than that, it is a standard multifamily project. Plans are to build 120 units on 17 acres. Including a clubhouse, there would be 15 single-story buildings. The construction cost was estimated at $11.84 million, with total costs reaching almost $17 million. About one-fifth of the units would rent at market rate.
This year, Texas has close to $70 million available in tax credits and JES Development will likely ask for $1.5 million, which is near the maximum for a single project, Feaster said. Applications are due March 1.
“We’ll find out in the July (TDHCA) board meeting,” Feaster said of the possibility of an award. “If we’re successful, we will try to start construction in the following six to seven months.”
Texas Multifamily Markets in the 3rd Quarter (Oct. 2015) by ALN Apartment Data Inc. (www.ALNdata.com)
|MARKET INDICATORS||DALLAS||FORT WORTH||AUSTIN||HOUSTON||SAN ANTONIO|
|Units Absorbed (Annually)||14,778||5,163||8,426||10,425||5,871|
per Sq Ft
per Sq Ft
Adolfo Pesquera is a veteran news journalist. He has previously worked for Hearst Corp., American Lawyer Media, News Corp and Freedom Communications. His work has been published in newspapers and magazines throughout the United States. He is a communications graduate of the University of Texas-PanAmerican.
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