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Multifamily housing bubble may be in the future

While single-family housing starts remain down, rental demand is driving new multifamily construction. But how long the demand will last is uncertain — an uneasy consideration for investors whose current investments may take years to hit the market.

"People who are thinking about renting are going to think about buying again, so the increase in demand for rental housing will start to plateau and supply will still be high," said Stan Humphries, chief economist at Zillow (Z), who said he thinks the demand for multifamily housing will be met within "the next couple of years."

At the National Association of Real Estate Editors conference in Denver last month, Humphries said the multifamily sector would "be the next bubble." But, he doesn't want you to associate that word with the "Armageddon this country just endured."

"I have trouble thinking of any other market that is as prone to booms and busts as the real estate market," he said in an interview with HousingWire. "What makes this one a little bit different is that it's almost the echo of a very large bust, meaning that what is causing the rental boom is the mirror of the housing bust."

The Joint Center for Housing Studies at Harvard University shows annual jumps in multifamily starts, according to a recent report that shows 2011 saw construction begin on 178,000 multifamily housing units in 2011, up from 109,000 two years earlier. In early 2012, those starts had jumped to 225,000 units on a seasonally adjusted annual basis.

This is still far below the roughly 340,000 starts averaged each year in the decade prior to the downturn, but a continuation of the trends seen this year that may push the numbers closer to normal.

"What is happening is healthy because we need the supply desperately, but it's just a natural part of the capitalist marketplace that people crowd in to satisfy a need and at some point that need is met," Humphries said, noting that those who have outstanding plans to produce more multifamily after the need is met may find themselves with extra product on their hands.

Humphries said the ability to gauge when the need will be met several years out is the trickiest part, but one that investors face constantly when choosing to invest in projects that won't turn around for years.

Mark Obrinksy, vice president of research and chief economist at the National Multi Housing Council, said this worry is not new to investors.

"This is the world that multifamily developers and owners live in," he said.

"In this industry people understand that you are never going to know what conditions are going to be like three years from now," he said. "But if that were an obstacle then you would never be able to produce any new multifamily housing."

He said different firms have different ways of dealing with shortages of demand. Some firms believe they should build in constrained markets that are difficult to build in. That way, even though it may be difficult to get a project started, they are less likely to encounter unexpected competition. Others go for markets that are easy to build in, believing that even if they don't fill the building right away, the demand will always be there.

Tom Bozzuto, chairman and CEO of multifamily developer The Bozzuto Group, said he's not as concerned about demand, though he does believe there will be areas in the country where there will be excess supply in the short term because capital was invested too quickly.

"I think what most of us fail to do, and what's very difficult to do, is to really understand what projects are working their way through the pipeline and what is likely to get financed," he said.

Unfortunately, said Bozzuto, those statistics are hard to come by. He advises investors keep their ear to the ground and not "under estimate the ability of the other guy to get the project started."

"We would all like to be building at a time when no one else is building, and if you are lucky you can do that," he said. "But most of us aren't lucky, and we all think we're smart by getting into the market early, but what we don't realize is that there are 10 other smart guys out there."

In the meantime, Bozzuto recommends investors not invest too much capital in any given project, and hire the best managers and project planners they can to be competitive.

Fortunately, Bozzuto doesn't believe that the rental market is in for a downturn anytime soon.

"I don't know if this is wishful thinking on my part, but I think we are going back to a day and age where people look at a home purchase as a lifestyle choice," he said.

Throwing out examples like bike sharing and video streaming, Obrkinksy theorized that the use of things may now matter more than the legal ownership of them. While he said he doesn't know whether that will also be true for housing, he thinks current indications point to renting being valuable in the long term.

"The context that we sometimes forget is that the population is increasing and households are increasing. In our world, you can have more homeowners and more renters. One is not always at the expense of the other." he said. "We'll see more people in the for sale market than we've seen in the past couple of years, but I don't think that means we are running out of renters."

jhuseman@housingwire.com
@JessicaHuseman

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