Manning, who would like to add more market-rate product to his portfolio, found the same thing. “It’s been challenging because of the cap rate decline that’s occurred over the past couple of years,” the Boston Capital president says. “While the yields are definitely less than they were four years ago, they’re attractive relative to alternatives.”
Given all the bidding competition from 1031 exchanges, condo converters, and institutions, Manning turned to one of his company’s core strengths: development. “That ability to achieve higher yields in new construction is directing our efforts in that direction,” he says. “In affordable housing, every deal we do is in new construction and substantial rehab. We’ve taken advantage of that skill set and focused on more new construction transactions.”
But costs for building new are rising as well. Condo developers can afford to pay more for land than apartment developers, especially in infill areas, and will drive up prices. “The land is not easier to buy,” says Bruce Ward, president of Alliance Residential Co., a developer, owner, and manager in Phoenix. “Sites near entertainment, amenities, and 24/7 environments are getting more difficult to get.”
Building materials and labor are also getting more expensive. “Virtually every commodity and all labor [saw] just across-the-board increases,” says Wood, which started 6,016 units in 2004. “Our costs were up over 10 percent last year and another 10 percent this year. That’s a pretty meaningful change in construction costs.”
Not everyone sees those increases as a bad thing. Linneman, for one, thinks the multifamily market remains overbuilt, with fundamentals continuing to struggle until there’s a better balance between supply and demand. “I still think the multifamily market is being overbuilt, but now it’s being overbuilt as condos rather than rental,” the real estate professor says. “If the condo demand dries up, they’re all going to become rental units. That’s a flood of competition, especially when you think that half of all condos are being sold or pre-sold to people who will rent” the units out.
Others see the combination of demographics (the entrance of echo boomers, baby boomers, and immigrants into the rental and condo markets) and social trends pushing even more multifamily building in the future. “We have a movement in this country for smart growth,” Wood says. “That’s beginning to get some traction. That’s a trend that inevitably leads to higher density. And, higher density will benefit multifamily for-rent or for-sale.”
Whether these trends push occupancies, soak up excess supply, and bring better fundamentals in 2005 is anyone’s guess. But until more jobs are generated and interest rates rise, Manning and his counterparts must continue to wait for the apartment market’s elusive recovery.
