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Multifamily demand outpaces supply

Rising rates push consumers to rent

As home prices and mortgage rates rise, it will become more difficult for potential homebuyers to purchase a home in light of today's tighter lending standards.

With homeownership no longer an option for many, demand for rental properties is on course to keep outpacing housing supply, investors in the space say. In fact, according to an infographic put together by Alan Feldman, CEO of Resource Real Estate, a minimum of 240,000 new apartments each year is needed to meet expected demand levels for the next seven years.

To date, only about 130,000 new apartments are expected to hit the market in 2013. "It’s very simple, the only people or companies that satisfy that demand are profit-seeking developers," said Feldman.

However, when a developer builds an apartment building, the cost they have to pay on a per-square-foot basis is expensive. Developers can’t build a house or an apartment building and rent it for a price that would be affordable to the average worker that makes $30,000-$60,000 per year, Feldman added.

As a result, effective rents have grown a cumulative 22% over the past decade compared to single-family homes, which measured 4.1% above the median price in 2002, Feldman notes in his data.

On top of the cost, apartment buildings often take years to build. "This is the aftermath of the great financial crisis, which really stopped everything in 2008-2009," he explained. "It’s going to take a long time for things to return to the norm in terms of construction returning to satisfy that demand in apartments."

Feldman’s company, Resource Real Estate, is working to add to the supply of available apartment rentals. His company revitalizes pre-existing multifamily properties, which are often dated, and makes them appealing to renters. Resource Real Estate focuses on the middle of the bell curve.

In order to satisfy the demand for this cohort, the way we compete is we buy older properties — five, 10, 15 or 20-years old — at a discount to their replacement cost, said Feldman. Often they need some work or have been neglected.

Plano, Texas-based American Communities, a real estate firm that focuses on acquiring and developing multifamily communities, recently acquired three multifamily properties in North Texas to benefit from the ongoing uptick in demand. 

The real estate firm has already started working to renovate and upgrade the properties. “Within hours of closing on the properties, our maintenance team was on site to complete needed repairs,” said Lisa Holcomb, chief operating officer at American Communities.

As Feldman noted, the quality of rental housing stock right now is just not that good. “[Renovating] enables us to deliver rental housing affordably to the workforce,” he said.

Feldman added that his company has markets throughout the country, but typically focuses on cities where there’s job generation — something that he claims will be necessary in order to level off the supply and demand that the multifamily segment is seeing right now.

"You’re going to need to see job growth first because job growth will ultimately improve consumer confidence," he said. "It will come back when jobs come back."

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