Why Multifamily Overbuilding Is Not a Big Issue

MIAMI—Hundreds of commercial real estate players gathered at the Fontainebleau Hotel in Miami Beach on Wednesday to glean from multifamily industry experts at RealShare Apartments East. From developers to capital markets gurus to economists, panelists tackled tough issues facing the multifamily industry and offered insight into the opportunities in today's market.

In the Pulse of the Pipeline: Development Update panel, Jim Kraft, president of Del Boca Vista, moderated a discussion between Mark Humphreys, CEO of Humphreys & Partners Architects, and Ronald Ladell, New Jersey senior vice president of AvalonBay Communities. They discussed the variety of factors converging to impact multifamily development.

“In the urban markets nationally where we are doing high density projects there are a lot of Echo Boomers that can't afford them—even a micro unit they can't afford,” Humphreys said. “We are also seeing a completely unpredicted huge number of Baby Boomers going toward rental properties. Word on the street is we need bigger units and we need to watch how many of these small units we build in these properties.”

Multifamily developers are facing clear opportunities and challenges, and the panelists talked about both. On the challenge side, rising construction costs, limited land availability, and competition for quality sites are tempering any talk of overbuilding in the near term. At the same time, most developers seem to be focusing on 10 or 15 core markets.

“The best time [to build], frankly, was back was 2009 to 2011 because every laborer was desperate for work,” Ladell said. “We were able to do numbers that were astonishing. Today, construction prices are growing 8 to 10% a year, not only driven by commodities but also driven by labor.”

Ladell said land is scarce in most of the hot markets. That, though, is resulting in what he called “rational exuberance” on pricing. In a statement that got some cheers, he bluntly revealed that “everybody lies about yields.”

“In a suburban world we look to do and are achieving cash-on-cash returns in the high sixes low sevens,” Ladell said. “That's a 250 basis points spread. That's a pretty good return. Others not achieving that and that's why they are so eager to get into the multifamily market.”

Ladell lamented that land prices have almost doubled overnight in the markets his company targets. The prices, he said, are “way up there.”

“New Jersey and Manhattan are somewhat of an anomaly,” Ladell said. “In other market where it's not all high-rise construction—in middle markets—if I do a podium it's going to cost me 160 per square foot. If I do a high-rise I can do it from $180 to $220 per square foot, depending on how it's figured. In some case, we're seeing that a high0rise makes as much sense as a podium and you are getting more units.”