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Apartmentalize Attendees Gather in San Diego to Tackle Such Challenges Facing Multifamily as Affordability, Generational Shifts, New Business Models

Participants in National Conference will be Focused on Ways to Keep Residential Rental Housing Competitive Amid a Host of Challenges
June 13, 2018
As host city for this year's NAA conference, San Diego encapsulates many of the challenges facing the industry, from affordability to continued construction of expensive, luxury units, such as the 718-unit, $400 million Park 12, scheduled to open this summer.

As more than 9,000 attendees and 500 exhibitors arrive for Apartmentalize, billed as the apartment industry’s biggest annual trade show, host city San Diego sports supply-and-demand multifamily fundamentals that are quite familiar in many of the nation’s largest urban markets.

The region has more than 2,000 apartment units currently under construction and set to be delivered to market by the end of this year, with more coming in 2019 and 2020. The bulk of this year’s deliveries -- more than 1,500 units -- are being added in San Diego’s East Village via projects like the 718-unit, $400 million Park 12, which will be downtown’s biggest-ever apartment complex by unit count when it opens this summer.

And yet, for various reasons, San Diego developers, like those in most other major metros, can’t build nearly enough units to satisfy rising demand, especially for apartments considered affordable for most consumers.

Real estate economist Alan Nevin said that if recent history is a guide, the new downtown San Diego properties coming online this year should see favorable response from tenants, especially from 35-and-under millennials, based on their proximity to other popular attractions. Greystone’s Park 12 project, for instance, will give tenants direct views of Major League Baseball games and other events at the nearby stadium known as Petco Park.

The bigger question being asked by experts in San Diego and other cities, is how long current trends can hold up, as rents continued to rise despite a steady buildup in supply over the past half-decade that barely moved the availability needle for the nation’s low-vacancy metro regions. Monthly rents at Park 12, for example, will start at about $1,700 for studios, with one-bedrooms going for $2,400 and two-bedrooms going for $3,500, which hardly qualifies as affordable housing.

“The question eventually will be whether downtown San Diego can continue to bring in these younger people when a two-bedroom apartment is going for $3,500 a month or more,” said Nevin, director of economic and market research at San Diego-based consulting firm Xpera Group.

Apartment affordability remains a key issue among many others for U.S. multifamily operators and investors. Participants at the four-day Apartmentalize national conference of the National Apartment Association beginning June 13 at the San Diego Convention Center, will be focused on ways to keep residential rental properties competitive amid a host of challenges.

Those challenges include the incursion of alternative business models aiming to serve shifting consumer requirements, similar to the way that Airbnb has impacted hotel stays and WeWork invaded the office space, and which is now rolling out its WeLive concept, generating strong response with its apartments clustered around collaborative social spaces, in New York’s Lower Manhattan and suburban Washington, D.C., with another complex slated to debut in Seattle in 2020.

On top of this, there are changing housing needs among the various generations, including Millennials seeking collaborative social spaces in urban-centric environments, while Baby Boomers and other downsizing empty-nesters redefine what “senior apartment” communities should offer them in retirement.

Also up for discussion are the ways in which technology is both disrupting the apartment industry and helping operators boost efficiencies. While it’s now easier than ever for consumers to book short-term apartment stays online, technology is also enabling apartment owners to track maintenance requests, collect rents, and price their units based on seasonal demand trends, the same way that airlines sell seats and hotels book rooms.

Affordability remains among the thorniest of issues, as rising housing prices spark calls for apartment rent control in places like California, where several local and state measures are heading for the election ballot this year. In Washington, DC, tenants are increasingly resorting to 'rent strikes' to protest the rising cost of housing and substandard conditions.

There's a persisting mismatch between the type of housing that's supplied and what's demanded in the apartment market. CoStar Group data indicates that while the vacancy rate for the most expensive 10th of U.S. apartments topped 13 percent in the first quarter of 2018, all the rest had a vacancy of about 6 percent. But pricey units predominate among the more than 530,000 apartments now under construction nationwide.

A 2017 study by the National Multifamily Housing Council and National Apartment Association estimated that the U.S. will need 4.6 million new apartments by 2030 to meet projected demand. That would require at least 325,000 units to be built annually, yet just 244,000 units on average were delivered each year between 2012 and 2016.

According to consulting firm PwC, nationwide unit completions reached a high water mark in 2017, at nearly 375,000 -- although that did not do much to address the supply imbalance between high-end and moderately priced apartments.

One upshot of under-supply is that per-unit prices have been rising steadily during the past decade for big multifamily properties trading in major markets.

According to Marcus & Millichap, multifamily properties by 2017 were trading in the $200,000 to $299,000 per-unit range in markets including Los Angeles, Oakland, Orange County, Seattle and San Diego. The range was $300,000 to $450,000 per unit in Boston, New York City, San Francisco and San Jose.

Aaron Bove, senior vice president in the San Diego office of Marcus & Millichap, noted that the city’s apartment vacancy rate continues to hover around a historically low 3 percent, similar to other high-demand markets. Properties hitting the market are still yielding multiple offers, while San Diego and other West Coast regions still have considerable barriers to entry for new apartment development, including high builder fees, limited land availability and restrictive zoning laws.

Other headwinds include rising interest rates and apartment construction costs.

"The construction industry is seeing some labor shortages, and there are challenges in getting subcontractors to work sites,” Bove said. Still, factors including current employment market strength and rising wages should help keep current demand fundamentals in place for the rest of 2018 and likely beyond, he added.

While conditions of under-supply in most major markets are likely to favor landlords, PwC noted the trend lines at this stage of the post-recession real estate recovery have caused owners, investors and their lenders to take pause and wonder how much longer the good times can last.

Among the issues causing jitters, said PwC in its 2018 Emerging Trends survey report, are rising financing rates, potential slowdowns in job growth, and unknown impacts of tax reforms, immigration changes and pending trade policy shifts. Nevertheless, apartments generally retained high “buy” recommendations relative to other property sectors in PwC’s national investor survey.

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Apartmentalize Attendees Gather in San Diego to Tackle Such Challenges Facing Multifamily as Affordability, Generational Shifts, New Business Models

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