How higher rents and rising values ​​will boost multi-family construction in 2022

As the COVID-19 pandemic has hit many areas of commercial real estate, the multi-family sector has emerged as a clear winner.

Although apartment rents fell in the first few months of the pandemic, they quickly recovered in early 2021. These rent increases paved the way for an equally robust sales market that pushed up home prices. apartment communities. Growth in rents and valuations, taken together, creates fertile ground for development.

But just because apartments are making money doesn’t make the year to come easy. Industry leaders, especially on the development side, see a number of challenges and opportunities in the New Year. Here, Construction Dive examines the most important factors for the multi-family sector in 2022.

Rent increases should moderate

The COVID-19 crisis in the apartment industry did not last long. In the first quarter of 2021, demand doubled the usual 25,000 units normally seen at this time of year. In the summer, the apartment industry saw record rent increases.

However, CEO Joe Lubeck doesn’t think these double-digit increases are sustainable until 2022, especially with inflation.

“People pay more for food, and more for gasoline and everything,” he said.

Jay Parsons, vice president and deputy chief economist at RealPage, agrees that rent growth could slow this year.

“We are forecasting single-digit national growth,” Parsons said. “These are still big numbers compared to most years, but we probably won’t touch the 16% or 17% range that we’ve seen. [in 2021]. “

In some subways, another factor limiting growth could be rent control legislation. The cap on measures increases has emerged in a number of markets across the country. For example, in November, Minneapolis voters gave city council the option of implementing rent controls, while residents of St. Paul passed a voting measure to cap most rent increases at 3 % per year.

Apartment industry trade groups say rent control legislation is on their radar in many other places, including Colorado, Nevada, Illinois, Washington, Massachusetts, Washington, Pennsylvania and even in the red states, like Kentucky and Florida.

“I think what was traditionally a coastal problem in New York, San Francisco and New Jersey has now entered the Midwestern space,” said Greg Brown, senior vice president of government affairs for the National based trade group. in Arlington, Virginia. Association of apartments. “And that’s a cause for concern for us.”

Values ​​will increase

As rents continued to rise, apartment values ​​also skyrocketed in 2021, increasing 16.8% from October 2020 to October 2021, according to New York-based research firm Real Capital Analytics (RCA) CCPI. , which assesses the value of commercial buildings. real estate.

Even though rent increases are moderate in 2022, intense competition for apartments is expected to continue to drive up prices.

Today, the number of investors in the market far exceeds the number of properties for sale.

“We are seeing a demand for assets that exceeds the availability to buy them,” said Charles Foschini, senior general manager of Chevy Chase, the mortgage team at Berkadia, a Maryland-based apartment lender.

However, this demand is pressing some buyers. After purchasing 14 properties in the first eight months of 2021, Doug Root, co-founder and managing director of Arlington, Va.-Based apartment owner Blackfin, was only able to close one transaction during the year. last quarter of 2021.

Some of the investment groups that win deals are relatively new entrants to the space.

“I think every day it seems like there is more private capital, syndicators and crowdfunders,” said Matt Ferrari, co-chief investment officer and head of acquisitions and east coast asset management. for TruAmerica Multifamily, based in California, an active buyer in 2021..

As more investors enter the space, there are still not enough properties under construction to meet their appetites. This lack of supply, coupled with growing demand, pushes prices up.

“You have zoning restrictions limiting the number of apartments [being built]said Jim Costello, senior vice president of New York-based commercial real estate data company Real Capital Analytics (RCA).

Apartment buildings will continue to sell

As rents exploded, so did apartment sales. Significant rent increases have attracted investors to the multi-family business from other real estate sectors and around the world in 2020.

“Real estate is getting more and more popular,” said Bobby Lee, CEO of Los Angeles-based apartment owner and manager JRK Property Holdings, which acquired 12 properties and sold two between January 2021 and early 2022. “And there are really only two.” safe places in real estate right now – industrial and multi-family. So I think there is going to be a lot more capital coming into this space. “

The popularity of apartments as an investment class is shown in the numbers. By the end of November, $ 201.3 billion worth of apartments were sold nationwide in 2021, according to RCA. For comparison, the industry’s previous record for transactions was $ 193 billion, recorded in 2019.

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Root predicts that some buyers could pull out early in the year.

“This [the apartment sales market] had been in tears, ”Costello said. “He struggled at the start of the pandemic, but he closed 2020 with a record volume of transactions in December. It was on fire, and in 2021, it’s off to the races. “

“I think the deal flow will be very weak in the first quarter as it looked like the whole market was for sale at the end of this year,” Root said. “If you were a seller, and certainly a private seller, there was a lot of appetite out there, and it made perfect sense to market your business.”

Others expect the flood of money seeking apartments and willing sellers to continue to fuel deals over the coming year.

“I just feel like 2022 is going to be even bigger than 2021,” Lee said. “And I think 2023 could be sequentially another good year. You could have another good two years because you’re going to have willing sellers.”

Despite the obstacles, developers will build apartments

With good performance in both rents and sales, developers are eager to build more apartments. And debt and equity are lining up to support these deals.

“We have so much equity chasing us right now,” said Steve Hallsey, executive vice president of operations for Atlanta-based Wood Residential Service, the management arm of large developer Wood Partners. “We really try to be very selective.”

Permits, which are a good barometer of future production, continue to increase. In November, 560,000 multi-family units were licensed, a 6.1% increase from October and a 15% jump from the same period in 2020, according to RealPage.

As of November, 560,000 multi-family units were licensed, according to the US Census Bureau. This is a 6.1% increase from October and a 15% jump from a year ago. Meanwhile, 491,000 multi-family units were started for the same period, up 12.1% from the (revised downward) annual rate for October and 39.1% from November 2020 .

Yet launching projects to meet demand remains a challenge. Adam David Lynd, president and CEO of Shavano Park, a Texas-based apartment developer, director and owner of The Lynd Co., has seen the prices of several products rise dramatically over the past two years.

“The costs are through the roof – everything from the flooring to the roof to the shingles and the glass,” Lynd said. “The shortage of the supply chain is really hurting everyone.”

Construction challenges will continue

If that is not enough, the prices of labor have also increased over the past year.

“The workforce availability situation appears to be getting worse,” said Ken Simonson, chief economist for The Associated General Contractors of America. “Although the demand for apartments appears to be holding up very well, it will be very difficult to produce and deliver them on time and on budget. “

Land also continues to be a challenge. In fact, it’s a problem for all types of residential rental properties, according to Joe Morrison, president of Sands Cos., A construction and development company that builds apartment-style cabins in Southeast Myrtle Beach, in South Carolina.

“It’s very competitive,” Morrison said. “It’s like you’re being interviewed by the sales people now… They’re checking your background and what you’ve done to make sure you can make and create a product that you say you’re going to make. “

Legislation could help

While the industry is poised to fight rent controls, it welcomes further government action. A few local, state, and federal governments are entering 2022 looking for ways to facilitate apartment building. Faced with the housing shortage and rising costs, some local governments are considering a larger supply as a solution. To achieve this goal, they facilitate the construction process.

For example, Minneapolis has single-family zoning removed to allow denser housing. Other locations, such as Mongomery County, Maryland, are consider making it easier to add density in single-family communities.

“In California, they’re trying to do a lot more of a carrot and stick approach,” said Jim Lapides, vice president of the Washington, DC-based business group of the National Multifamily Housing Council. “They’re actually trying to use a stick this time around to encourage more housing development. So I think we’re seeing more of it across the country.”

At the national level, the bipartisan Yes In My Backyard (YIMBY) law has the potential to further stimulate development by encouraging localities to reduce regulations.

“I think what’s most encouraging is that a lot of the conversation has changed around this affordability issue and people are realizing that we need to increase the supply,” Lapides said. .