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Multifamily Executive: Industry Shows Exuberance at NMHC, but is the Optimism Too Much?

January 20, 2011

The decidedly warm Southern California desert didn’t stand a chance against the hot prospecting and fevered optimism felt by apartment industry executives who swarmed the La Quinta Resort & Spa in Palm Springs this week at the National Multi Housing Council’s jointly held Apartment Strategies Conference and Annual Meeting. But the more than 1,500 attendees should heed warning: The excitement can’t cover up continuing challenges.

Buoyed by dream demographics and a strong case for pent-up demand, executives across private, public, and institutional sectors mingled, reconnected, shook on deals, and pointed to 2011 as a banner year for multifamily. Consider AMLI Residential, which doesn’t offer concessions and is going to see 6 percent revenue growth this year. Its strongest markets, such as Austin, Texas, will likely see rent increases in the 12 percent to 15 percent range, said chairman and CEO Greg Mutz.

Austin is an anomaly, however, says Greg Willet, director of research at MPF Yieldstar. As is Washington, D.C., and Denver—both markets that will likely see double-digit rent growth as they lead the way in 2011. Still, it will be a stellar year for rent growth overall. Even conservative companies in tough markets are underwriting 2 percent to 3 percent rent growth in the next 12 months, Willett adds.

As a result of these revenue projections, investment and acquisition activity is expected to also be at an all-time high, with a palpable demand for quality apartment assets in the air already. An informal poll of the NMHC audience gathered for one of the large sessions indicated that the market is full of net buyers, yet only a small handful of individuals consider themselves net sellers.

Development Rebounds

On the groundbreaking side of the business, developers say shovels will fly this year, and that by 2012, multifamily will see a record-breaking number of new starts. Tom Bozzuto, CEO of The Bozzuto Group, points to a frenzy of demand, a willingness on the parts of banks to increase their construction lending, and a significant decline in construction costs (down about 25 percent across the board) as driving the development uptick.

Smaller developers are reporting starting, on average, 500 units in 2011. Larger pipelines are eyeing upwards of 2,000 units for the year. The apartment unit of 2011 is targeting a younger demographic, despite indications that older individuals are returning the rental pool. “The most significant change in development has been the evolution and diversification of the project designs and buildings themselves. You can’t resist it,” Bozzuto added. “New projects have to be hip, edgy, bright, full of public space. They need to connected digitally and have an element of social consciousness.”

And value-add opportunities seem to be flourishing, as lenders and capital providers become more comfortable underwriting rent increases. Take Atlanta-based Wood Partners, whose new board members from CBRE Investors are said to be quietly eyeing core markets for new value-add opportunities. Or TRECAP Partners, which now owns 200,000-plus units after taking over Capmark’s assets last year and is in the process of raising a value-add fund.

A Word of Caution

Still, many of the NMHC attendees say that these bouts of optimism really only apply to core markets. Outside of the New Yorks and San Franciscos of the world, there is still a struggle to find equity, push rents, and show strong returns. “Chasing yield is like chasing a car down the freeway. At one point, you’re going to get trampled. Going into [secondary markets] because your original business plan didn’t pan out is a bad idea,” said Michael McNamara, managing director of TRECAP Partners.

Still, consensus doesn’t necessarily make for a good outcome. Especially when you consider that some secondary markets (take Sioux Falls, with its 4 percent unemployment) may not be a bad bet, after all.

Despite the jumping, jumping, high optimism vibe at the NMHC meetings, some apartment owners do advise taking it slow and developing a business strategy that works for you. “There are always unintended consequences,” Mutz said. “You have to continue to be diligent. I think that managing expenses is going to continue to be a challenge for folks.”