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Apt. Construction Lifts Housing Market, But Don't Call It a Building Boom (Yet)

New Multifamily Starts Remain Far Below Historical Levels -- And Nowhere Near the Overbuilt Markets of 10 or 20 Years Ago
December 21, 2011
A surge in new multifamily construction in November resulted in the strongest month for U.S. residential builders since April 2010, with a number of large apartment projects breaking ground over the last two months.

While the increasing number of new apartment units breaking ground is picking up momentum, especially in the top coastal markets, the construction activity hardly qualifies as a boom as measured by either peak levels or historical averages for new construction starts.

That said, apartments remain the only major CRE product type showing demand growth justifying new supply at the moment, and first-movers are hoping to capitalize on the demand opportunity before the project pipeline fills up again in selected markets.

Starts of buildings with five or more dwelling units rose 32.2% in November from the previous month to a rate of 230,000, the highest since September 2008, according to statistics released this week by the Census Bureau and Department of Housing and Urban Development. On a year-over-year basis, multifamily starts surged 180.5% last month compared with November 2010.

The apartment building activity pushed total private-market housing construction starts to a seasonally adjusted rate of 685,000 in November, an increase of 9.3% over revised October numbers, and 24.3% higher than the same period in 2010.

The Northeast region saw the largest gains in total residential starts (single-family and multifamily) at 53.8%, followed by the West at 22.6%. Starts declined 18.2% in the Midwest and rose a modest 4.2% in the South.

The pain clearly continues for single-family housing, where construction starts rose just 2.3% in November.

Total building permits for future construction of new houses and apartments rose 5.7% last month over October and 20.7% over November 2010. Permits rose just 1.6% for single-family houses from October -- and more than 16% for buildings with five or more units. From November 2010, permits for single-unit housing rose 3.6%, and 80.6% for 5+ unit dwellings.

"While increases in [apartment] construction bear watching, the monthly percentage increases in supply have been very modest, especially coming off such a depressed low start base. Importantly, new supply as a percentage of existing stock, and starts in aggregate terms, do remain near all-time lows," Citi’s Michael Bilerman said in a research note Wednesday.

Based on a three-month moving average, multifamily and office were the only CRE sectors to report an increase in monthly starts in November at 11% compared to 2% in October. Retail, lodging and industrial starts experienced declines.

While CRE project starts have risen very modestly off the bottom as a whole, all of the property sectors remain significantly below their pre-recession levels, down an aggregate 72% from their peak and 59% below their historical average.

Multifamily, down 63% from the peak and 44% from the historical average, is faring better than warehouse, where starts are down 85% from their peak and 75% below their historical average; office (down 77%/72%), retail (down 77%/64%), and lodging (down 74%/57%).

As a share of existing inventory measured on a three-month moving average, multifamily saw the largest increase, up 7 basis points to 0.69% of stock, while industrial saw the greatest decrease, falling 7 bps to 0.44%.

While housing still has a long way to go to return to normal, the latest numbers are "one more indication that housing is slowly turning the corner," said Bob Nielsen, chairman of the National Association of Home Builders (NAHB) and a builder from Reno, NV.

"In scattered markets across the country, buyers who have long sat on the sidelines are starting to take advantage of today’s very attractive prices and interest rates, while others are making the move to a new apartment," Nielsen said.

The improvement in production and permitting levels, along with recent gains in builder confidence and other economic measures, "provides further evidence of the gradual strengthening that we expected to see in housing markets toward the end of the year," said NAHB Chief Economist David Crowe. "We anticipate continued, slow improvement in housing starts and sales through 2012."

Apartment developers hoping to time the market to take advantage of the opening development window have launched major projects in New York, Washington, DC, Boston, Los Angeles and a number of large secondary markets.

While well-capitalized REITs were the first to jump on the construction bandwagon, others are now following suit, according to Property & Portfolio Research (PPR), CoStar’s forecasting and analytics subsidiary. At just 0.2% of inventory, 2011’s additions will be less than one-third of the annual prerecession average from 2003-08. However, with permitting and housing starts increasing, deliveries will start to pick up by late 2012, PPR forecasts.

Fully entitled projects that can move off the shelf quickly could be good targets for investors, especially in high-barrier coastal markets.

Delivering quality product into a growing submarket amid a dearth of new supply is certainly compelling, particularly given that acquisition yields for high-quality assets are approaching, or have surpassed, peak pricing in many primary and secondary markets, thanks to exceptionally low interest rates, PPR said in a third-quarter report on apartment fundamentals by real estate economist Dan Egan.

Markets in the San Francisco Bay Area, Pacific Northwest, and Northeast, where occupancy levels and effective rents are approaching prerecession levels and single-family housing costs remain relatively high, should support new construction today.

In housing-bust markets such as Las Vegas, Sacramento, and South Florida, single-family affordability will present a risk to apartment owners once single-family prices stabilize and buyer confidence returns.

Once construction picks up, the bulk of new supply will deliver in the Southeast and Texas, including Austin, Raleigh, NC, and Orlando.

The following is a partial list of large multifamily projects that have broken ground or moved into the planning phase since November:

  • Gotham Organization, Inc.’s Gotham West, a $520 million residential development encompassing nearly an entire city block, broke ground in Manhattan. The project is anchored by a 31-story tower at 45th Street and 11th Avenue that will include 550 luxury units. In total, the project will include over 1,200 residential units among four buildings between West 44th to West 45th streets from 10th to 11th avenues in the Hell’s Kitchen neighborhood.

  • Chicago-based Fifield Cos. and national multifamily developer Wood Partners broke ground on K2, a 34-story apartment tower at 365 N. Halsted St. in Chicago’s Fulton River District, just west of the Chicago River. The 496-unit project is scheduled for delivery in 2013.

  • Milhaus Development has secured approximately $20 million in construction financing for the Penn Circle apartments in Carmel, IN and plans to begin work this month on the 193-unit project planned for the six-acre site.

  • Pollack Shores Real Estate Group has broken ground on the $40 million Steel House apartment project, a transit-oriented development in downtown Orlando, FL. The four-story development near the Lynx Central Station and future SunRail service will have 326 one- and two-bedroom apartments. The first units are expected to open next fall, with full project delivery by February 2013.

  • StonebridgeCarras and PN Hoffman formed a joint venture with Northwestern Mutual and plan to break ground next month on a $200 million mixed residential and retail project in downtown Bethesda, MD outside Washington DC that will include 250 residential units and 40,000 square feet of retail.

  • LNR Property LLC announced it closed on the purchase of the final 830 acres at the former Naval Air Station at South Weymouth, MA, slated for Southfield, a master-planned development that will include 2,855 housing units and 2 million square feet of office and retail space.

  • The Bozzuto Group broke ground on a $72 million apartment community in Baltimore's Fells Point neighborhood. Union Wharf will bring 281 apartments, 4,500 square feet of retail and parking on an undeveloped site at the eastern edge of the Fells Point peninsula overlooking the Inner Harbor.

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