Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/143044
However, such locations also have drawbacks, Lance admits. "Infll projects typically ofer unit sizes that can be 25 percent smaller than those of their suburban cousins," he explains. "Tat said, these properties ofer more-dynamic common areas for the residents to gather and socialize and the amenity packages we are seeing rival many hotels and condominiums." Such amenities appeal to young renters in Kansas City, Mo., too, which has caused the majority of new multifamily development to take place in the city's central business district. But the market's urban core is more susceptible to job losses as it can't ofer companies the same economic incentives as other cities in the metro area, according to Daniel Kann, MAI, of Valbridge Property Advisors in Overland Park, Kan. So some developers are looking to the outskirts of town, where job growth is occurring. "Kansas City has traditionally been a suburban apartment market due to the availability of inexpensive land, good infrastructure, and minimal trafc congestion," Kann explains. "Additionally, the [city's] entitlement process is less demanding than in other parts of the country, allowing for increased development on the suburban periphery." New luxury projects in the area are seeing asking rents from $1.00 to $1.50 per square foot. But these aren't the sprawling complexes ofen associated with suburban living. "Several of these projects are higher density than a traditional garden project, feature podium or attached parking, and are being marketed as a new urbanism design," Kann adds. Jerry Hall, CCIM, of NAI Ohio Equities in Columbus, Ohio, is seeing a similar bifurcation in central Ohio. He notes that approximately 2,700 multifamily units are expected to be delivered in his market this year, with almost half located downtown. But the cost of land, accessibility, schools, and destination retail are also drawing developers to Columbus' outer belt, Hall says. Multifamily Completions vs. Vacancy, Absorption Units (000's) 8.0 250,000 200,000 Completions Absorptions Vacancy 7.0 6.0 5.0 150,000 4.0 100,000 3.0 2.0 50,000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012* 2013* 0,000 1.0 –50,000 0.0 He cites the furry of multifamily construction activity in the Polaris area, north of Columbus, which has a 97 percent apartment occupancy rate. Approximately 800 units were under construction there as of March, according to the Columbus Business Journal. Edward Rose & Sons is expected to deliver the largest project, the 309-unit Avenue at Polaris, this summer. "Tey bought the dirt right before the crash," Hall says. "Te timing was right for building." Building Block? But the uptick in multifamily development activity in secondary and tertiary markets worries players. "Te concern is: Are we going to overbuild as in the past?" Hall says. "Back in the 1990s we saw the level of supply exceed demand, which was afected by frst-time home buyers. Occupancies dropped to 85 percent to 88 percent where they were normally 94 percent to 97 percent." Lenders are watching such markets closely, and fnancing may become scarce. "As of the beginning of 2013, there are plenty of options available for the entire capital stack," Lance says. "But there are concerns that lenders will become much more selective as the pipeline of new projects continues to grow." But markets such as Lafayette, La., may be safe, thanks to what Jeremy Harson, CCIM, calls "prudent decision making." Despite favorable multifamily development conditions — vacancy and unemployment are both under 5 percent — "All involved are a bit gun shy to start building too much too quick," says Harson, a commercial agent with Van Eaton & Romero in Lafayette. He expects this trend to continue for the next two to three years, based on current permit applications. And is it possible that, across the U.S., fears of overbuilding are unfounded? In a March 30 post in his blog, "Jones on Real Estate," Ted C. Jones, senior vice president and chief economist for Stewart Title Guaranty Co., looked at job creation vs. residential and multifamily building permits issued in 2012. He noted that 2.1 net additional new jobs were created for each dwelling unit. As the normal range is 1.25 to 1.5 net additional new jobs, he argued that overbuilding is, in fact, not an issue. Anderson suggests that we may be overlooking the bigger problem. "At this time we are less concerned about oversupply than we are about overpricing," he says. "Te gap between the purchase cap rates and fnance rates is now less than 100 basis points in some of the gateway markets. Tis is a strong indication that many markets are now on a pricing bubble rather than oversupply." Will this situation eventually help to drive construction activity beyond the Midlands and Odessas of the world into riskier secondary and tertiary markets? If Tampa, Columbus, Albuquerque, and other select cities are any indication, it's already happening. Demand is beginning to well up. And developers and investors who recognize the potential in such markets may fnd themselves sitting on the next boom. *Forecast Source: Reis/Marcus & Millichap 38 July | August | 2013 Rich Rosfelder is associate editor of Commercial Investment Real Estate. Commercial Investment Real Estate