Suburban Redux Could Ease the Workforce-Housing Crisis

SOUTHERN CALIFORNIA—With not enough apartment supply to meet demand and most multifamily development going to high-end urban product, redevelopment of older suburban stock could be the answer, Resource Real Estate's EVP Kevin Finkel tells GlobeSt.com. The Philadelphia-based firm has invested in the Southern California market, owning Point Bonita Apartment Homes in Chula Vista and Yorba Linda Apartment Homes in Yorba Linda.

Finkel notes that with young urbanites moving to the suburbs, there are new opportunities for real estate investors. Instead of buying starter houses, these young people are looking to rent, and they are choosing the suburbs because entry-level homes are scarce, and home prices and city rent prices are rising far faster than incomes. We spoke with Finkel exclusively about why he believes renovated, updated suburban multifamily rental housing is the solution to the workforce-housing crisis.

GlobeSt.com: Why do you believe renovated suburban multifamily properties are the solution to the workforce-housing crisis?

Finkel: Fortunately (or unfortunately), we're nowhere near the solution. We can help relieve the pressures going on there, but the problem is enormous. If you look at multifamily construction over the decades, during the 1970s there were well over 4.5 million apartments built in this country, and the US population was around 215 million people at that time.” Most construction was happening out in the suburbs, and we very excited about this. These were very sleepy bedroom communities that were quite pro-apartment. The same is true for the 1980s—each of these decades saw well over four million apartments built.

But in the 2000s, it became a very different environment. There are more than 300 million people here, and by end of this current decade we will see less than two million apartment units delivered in the US. So we have a lot more people and a lot less apartments being developed. Today, we are really at about half of the development pipeline we saw in the '70s and '80s, yet the population has grown tremendously. Rents are going up because we're just not seeing a lot of apartment construction over a long period of time. This year will see roughly 250,000 to 300,000 units built—still below the 450,000 needed.

The apartments that are being built have two qualities that are challenging to the middle class. First, everything being built today is high end—there are virtually no apartments being built for the middle class today. The main reason for this is that construction costs have risen 37% over the past nine years. Labor, material and land costs are incredibly expensive compared to five years ago, so developers will build high end or they won't make money—they need to charge $2,000 or more per month per unit to make it worthwhile.

Second, while we know there aren't enough apartments being built, the ones that are being built are being built disproportionately in downtown areas of cities. This is because high-end renters want to be downtown, and they're usually younger renters. But more importantly, affluent suburbs are very protective of their public services, especially school systems. They're not allowing in lots of new children, so they put in density restrictions for new development. Developers can build single-family homes, but not dense apartments because this will bring a disproportionate number of children and people paying lower taxes. There are all sorts of regulations that make it difficult to build in suburban areas. So, if you're looking at affordability for housing, the choices are limited: you either live in very old housing ('70s and '80s in the suburbs) or you don't live in the suburbs.

One of the things we're doing is buying those older apartments and renovating them, putting capital back into them to help them feel new and modern, but working class people can afford them. The median household income in the US is $53,000, and this household can afford $1,300 to $1,400 a month in rent. The apartments will be renovated, look nice, feel good, be in area with good police protection and low crime and provide middle class renters with new product. Nobody else is building this.

GlobeSt.com: How should stakeholders get involved in helping solve this crisis via suburban multifamily renovations?

Finkel: There's no market mechanism encouraging developers to develop affordable properties in suburban areas. Affordable housing, yes, but there's no government force that will get developers to want to build middle-class housing. Even if the government gave tax credits for this, you wouldn't be able to build because the residents wouldn't let you do it. I think this just is, and it will continue for a very long time. From our standpoint, if you have the capital and experience renovating apartments, there's a huge opportunity for people because the demand is not being met. There's a huge market if you have capital and experience. Most individuals and publicly traded REITs don't want to do this investing, so you have to be someone who does this or find someone who does this with whom to invest.

GlobeSt.com: Which geographical areas of the country are best suited for this type of solution?

Finkel: Whether you're in Dallas, Boston, Omaha or Honolulu, this is a story that is happening everywhere. There are no markets in the country that don't have this issue going on. More development is happening downtown and less in the suburbs. A few markets like New York have an unusual number of new apartments in the market right now, and Houston is suffering from low cost of energy, but most markets are suffering from a lack of affordable homes.

If your city is doing a good job of attracting young, creative, educated people, you will have a growing number of all renters. Austin doesn't have the great weather or the ocean that California has, so why are all these young, creative. educated people moving to Austin? It has a creative music scene and vibe, and others are there. They know those jobs will follow, and they will have a growing metropolitan area, which is more valuable. It's not about geography, but looking at each city and asking, “Is it going to grow?” Then it's looking at the affluent suburbs of these cities. It's less about geography and more about the ability of cities to attractive creative labor forces.

GlobeSt.com: What else should our readers know about suburban multifamily?

Finkel: While we see a real resurgence of downtown areas in terms of job growth—walkability and the ability to interact with other people around you are important, and that's why see this move to urban, but this happens in the suburbs, too. Suburbs with and without sidewalks, cafes, etc., are reimagining themselves. Affluent and closer-to-center cities are the most successful suburbs. You want to be able to access those cities more easily. As a city becomes more interesting and full of arts, suburbanites want to take advantage of that; it's really important.

Steady gains in the US economy have resulted in net positives for the multifamily sector—will this wave continue for the foreseeable future? What's driving development and capital flows? Join us at RealShare Apartments on October 19 & 20 for impactful information from the leaders in the National multifamily space. Learn more.

SOUTHERN CALIFORNIA—With not enough apartment supply to meet demand and most multifamily development going to high-end urban product, redevelopment of older suburban stock could be the answer, Resource Real Estate's EVP Kevin Finkel tells GlobeSt.com. The Philadelphia-based firm has invested in the Southern California market, owning Point Bonita Apartment Homes in Chula Vista and Yorba Linda Apartment Homes in Yorba Linda.

Finkel notes that with young urbanites moving to the suburbs, there are new opportunities for real estate investors. Instead of buying starter houses, these young people are looking to rent, and they are choosing the suburbs because entry-level homes are scarce, and home prices and city rent prices are rising far faster than incomes. We spoke with Finkel exclusively about why he believes renovated, updated suburban multifamily rental housing is the solution to the workforce-housing crisis.

GlobeSt.com: Why do you believe renovated suburban multifamily properties are the solution to the workforce-housing crisis?

Finkel: Fortunately (or unfortunately), we're nowhere near the solution. We can help relieve the pressures going on there, but the problem is enormous. If you look at multifamily construction over the decades, during the 1970s there were well over 4.5 million apartments built in this country, and the US population was around 215 million people at that time.” Most construction was happening out in the suburbs, and we very excited about this. These were very sleepy bedroom communities that were quite pro-apartment. The same is true for the 1980s—each of these decades saw well over four million apartments built.

But in the 2000s, it became a very different environment. There are more than 300 million people here, and by end of this current decade we will see less than two million apartment units delivered in the US. So we have a lot more people and a lot less apartments being developed. Today, we are really at about half of the development pipeline we saw in the '70s and '80s, yet the population has grown tremendously. Rents are going up because we're just not seeing a lot of apartment construction over a long period of time. This year will see roughly 250,000 to 300,000 units built—still below the 450,000 needed.

The apartments that are being built have two qualities that are challenging to the middle class. First, everything being built today is high end—there are virtually no apartments being built for the middle class today. The main reason for this is that construction costs have risen 37% over the past nine years. Labor, material and land costs are incredibly expensive compared to five years ago, so developers will build high end or they won't make money—they need to charge $2,000 or more per month per unit to make it worthwhile.

Second, while we know there aren't enough apartments being built, the ones that are being built are being built disproportionately in downtown areas of cities. This is because high-end renters want to be downtown, and they're usually younger renters. But more importantly, affluent suburbs are very protective of their public services, especially school systems. They're not allowing in lots of new children, so they put in density restrictions for new development. Developers can build single-family homes, but not dense apartments because this will bring a disproportionate number of children and people paying lower taxes. There are all sorts of regulations that make it difficult to build in suburban areas. So, if you're looking at affordability for housing, the choices are limited: you either live in very old housing ('70s and '80s in the suburbs) or you don't live in the suburbs.

One of the things we're doing is buying those older apartments and renovating them, putting capital back into them to help them feel new and modern, but working class people can afford them. The median household income in the US is $53,000, and this household can afford $1,300 to $1,400 a month in rent. The apartments will be renovated, look nice, feel good, be in area with good police protection and low crime and provide middle class renters with new product. Nobody else is building this.

GlobeSt.com: How should stakeholders get involved in helping solve this crisis via suburban multifamily renovations?

Finkel: There's no market mechanism encouraging developers to develop affordable properties in suburban areas. Affordable housing, yes, but there's no government force that will get developers to want to build middle-class housing. Even if the government gave tax credits for this, you wouldn't be able to build because the residents wouldn't let you do it. I think this just is, and it will continue for a very long time. From our standpoint, if you have the capital and experience renovating apartments, there's a huge opportunity for people because the demand is not being met. There's a huge market if you have capital and experience. Most individuals and publicly traded REITs don't want to do this investing, so you have to be someone who does this or find someone who does this with whom to invest.

GlobeSt.com: Which geographical areas of the country are best suited for this type of solution?

Finkel: Whether you're in Dallas, Boston, Omaha or Honolulu, this is a story that is happening everywhere. There are no markets in the country that don't have this issue going on. More development is happening downtown and less in the suburbs. A few markets like New York have an unusual number of new apartments in the market right now, and Houston is suffering from low cost of energy, but most markets are suffering from a lack of affordable homes.

If your city is doing a good job of attracting young, creative, educated people, you will have a growing number of all renters. Austin doesn't have the great weather or the ocean that California has, so why are all these young, creative. educated people moving to Austin? It has a creative music scene and vibe, and others are there. They know those jobs will follow, and they will have a growing metropolitan area, which is more valuable. It's not about geography, but looking at each city and asking, “Is it going to grow?” Then it's looking at the affluent suburbs of these cities. It's less about geography and more about the ability of cities to attractive creative labor forces.

GlobeSt.com: What else should our readers know about suburban multifamily?

Finkel: While we see a real resurgence of downtown areas in terms of job growth—walkability and the ability to interact with other people around you are important, and that's why see this move to urban, but this happens in the suburbs, too. Suburbs with and without sidewalks, cafes, etc., are reimagining themselves. Affluent and closer-to-center cities are the most successful suburbs. You want to be able to access those cities more easily. As a city becomes more interesting and full of arts, suburbanites want to take advantage of that; it's really important.

Steady gains in the US economy have resulted in net positives for the multifamily sector—will this wave continue for the foreseeable future? What's driving development and capital flows? Join us at RealShare Apartments on October 19 & 20 for impactful information from the leaders in the National multifamily space. Learn more.