NMHC is Up for the Challenge of Meeting Apartment Demand
National Multifamily Housing Council President Doug Bibby is up for another big challenge, one that may consume the rest of his career in the apartment industry. With apartment demand projected to reach an additional 4.6 million households by 2030, he’ll have plenty to work on. And it may be no different than in 2001 when he joined NHMC, vowing to take on affordable housing issues.
One of the longest, deepest cycles that has shattered multifamily occupancy records in recent years still has some steam. Today, more than one-third of America rents, and industry analysts believe more apartments will be needed in the future just based on population growth and higher propensity to rent. According to a joint research report, “U.S. Apartment Demand – A Forward Look” issued recently, the country will need to add an average of more than 300,000 net new apartments to keep up.
Considering multifamily churns through 100,000 apartments a year, about 425,000 new units will need to come on line. While multifamily is close to meeting that average already (the industry completed 225,000 units on average from 2011-16), the challenge ahead is providing enough affordable housing in an industry driven by big amenities and record rents.
Multifamily challenge: Building 4.6 million apartments at different price points
When Bibby took NMHC’s helm, the industry faced the challenge of providing affordable apartments when home ownership was the name of the game. Today, apartment affordability has suffered because the deck is stacked against developers. Higher building costs and government regulations have forced developers to choose more lucrative property types because they can earn a greater return on investment.
Class A, B and C types command higher rents – which property owners and managers have been easily getting for the past few years – that exceed rent-to-income ratios of lower income families.
Bibby says there is little debate whether the U.S. has an affordability crises. According to census data, 31 percent of U.S. renters earn less than $20,000 per year. Also, 20 million Americans pay more than 30 percent of their income on rent.
Some lawmakers have proposed rent control to sway the balance but that’s hardly an option, he said. NMHC, which has long lobbied for more affordable housing, must strap on its boots and continue looking for ways to meet the needs for families of all income levels that are expected to bolster apartment demand for the next 12 years. A projected influx of immigrants who typically rent less expensive housing will force the industry to redistribute new construction to accommodate a broader base of renters, Bibby says.
“The challenge for us is that we’ve got to build 4.6 million apartments at different price points,” he said in a break at October’s NMHC OpTech Conference & Exposition. “I think people need to understand that the price point has gone up because the economics have changed so dramatically. This is a challenge of really changing the conversation, and you’ll hear more from us on that.”
Industry must engage state and local policies to facilitate change
Bibby wouldn’t say what NMHC has up its sleeve but that multifamily needs to lock horns with government regulators to give developers a chance to make affordable housing more viable.
Reaching a favorable price point based on the area’s median income in many markets is often unachievable, because land and construction costs are too high and local policies are too restrictive. Developers are often asked to comply with restrictions that hinder profitability, so they move on and choose more lucrative deals. After all, Bibby says, it’s a capitalistic world.
“You can’t mandate that you will come in a price at ‘X’,” he said. “You won’t get anybody to do it.”
The survey – authored by NMHC, the National Apartment Association, Axiometrics and Hoyt Advisory Services based on U.S. Census Bureau and industry data – identified several other challenges to development, including outdated zoning laws, unnecessary land use restrictions, arbitrary permitting requirements, inflated parking requirements and environmental site assessments. Mix that all up and Bibby and his staff have a lot to work on just helping the industry stay focused.
“The issue we’ve embarked upon—and it’s probably the biggest thing I work on the rest of my career here—is how do we engage state and local policy makers to help, rather than casting the blame and pointing the finger? How do we get them to help us to make this happen, bend the cost curve?”
State and local governments need to provide incentives that put developers in position to build much needed inventory and still make a profit without incurring hefty real estate prices.
Also, municipalities can back off of restrictions that add to the cost of construction, including easing parking and ground-floor retail mandates.
“The only way you can build at different price points is if those state and local governments say they’re going to create enterprise zones or use tax abatement, or they’ve got buildings and land they’ll give to you for a dollar,” Bibby said. “That would make it affordable for 25 years or whatever it is. It can be done.”
Immigration growth will impact apartment industry’s need for units
“U.S. Apartment Demand – A Look Forward” suggests that a contributing factor to future apartment demand will coincide with projected immigration growth.
Immigrants will offset a population decline within the U.S. attributed to smaller households and Millennials waiting until later in life to start families, says NMHC Senior Research Director Caitlin Sugrue Walter. She said the impact could be felt on the apartment industry as early as 2020 or 2021 when the number of people coming into the country will outnumber natural U.S. population growth.
“Immigration potential is a source of demand,” she said. “As population growth slows, that has an impact on things. With the growth of immigration, we’ll surpass natural population growth.”
Construction technology, existing supply offer remedies
Part of remedy for spreading the price points of apartments may lay in what’s been built and how future multifamily communities are constructed.
Bibby points to the recent emergence of cutting edge technology in construction. Robots can complete repetitive construction applications faster and at lower costs than manual labor. Entire homes may someday be built through 3D printing, a building concept that has been applauded for more efficient use of natural materials.
The technology produces sturdy, light-weight structures at a fraction of the cost and time to build conventionally.
Also, New York-based Construction Robotics’ says its Semi-Automated Mason (SAM) can lay 3,000 bricks a day compared to its human counterpart who can set 500. SAM is designed to work with a mason and perform the repetitive process of placing one brick on top of the other. The company says the machine can increase a mason’s performance three to five times and reduce lifting by 80 percent.
Elsewhere, Denver-based Prescient Co., Inc., is using 3D virtual modeling and production roll-formers, welding robots and drilling machines to erect multifamily, student and senior apartments and with more precision at a lower cost.
The Hyatt House at Belmar, which is currently under construction, is projected to be built at a cost 35 percent less than with traditional building materials and processes and be complete 50 percent sooner.
That may be good news to multifamily, which has endured longer build times – and late deliveries – resulting from U.S. labor shortages.
“Firms like Prescient are building state of the art factories with robotics and laser technologies so that you’re not relying on a carpenter to eyeball a joint,” Bibby said. “Everything is precision engineered onsite and they have a 500-mile radius that they can serve their communities. You’re going to see more and more of these factories coming up.
“The whole emergence of silicon valley-type technology being brought to a sector that has been in the stone age, this is going to make a dramatic difference in our ability, and also on the affordable side of the equation.”
Also, a big opportunity awaits in reconditioning and marketing many of the 11.7 million existing units that were built before 1980. The structures will need some type of renovation before 2030, Bibby says. The older supply, some of which dates to 1939 or earlier construction, represents potential relief to the need for affordable units.
A challenge that multifamily can overcome
Bibby, who held various positions at Fannie Mae from 1983-98, said affordable housing has gotten some relief just in the sheer volume of new supply that has entered the market in the last six years. He says signs that a slowdown in the market now underway is a positive correct for the balance of the industry.
In recent months, building permits have gone down, rent increases have ceased in some markets and concessions are becoming more widespread. According to the U.S. Census Bureau, as reported by RealPage, building permits dropped 17.4 percent in September 2017 from August 2017 and 25.3 percent from September 2016.
Of the top 10 metros, six issued fewer multifamily permits in September compared to a year ago. The slowdown was most noted in Atlanta, where permits dropped 23.9 percent, and Washington D.C. (19.2 percent).
“The market is slowing and that is good because we need to adjust and calibrate,” Bibby said. “This wasn’t going to run forever.”
Bibby believes the industry will persevere and spread inventory so that it meets future price point demand. The effort will take a lot of coordination and some special sauce that he is reluctant to share right now.
Getting there will be a challenge that he is more than ready to meet.
“What excites me is the basics of the business, the demand we point out, the dearth of supply,” Bibby said. “Actually, the affordability challenge excites me because I think we can make a dent in it. Meeting a challenge like that excites me a lot.”