Multi-Family Developers Face Practical Fears

Multi-Family Developers Face Practical Fears

Apartment developers have had a good run for awhile now, but they have their share of worries to contend with. We came across a piece in one of our standard reads, National Real Estate Investor, about the top issues for developers (which you can read in its entirety here: We took a look at the main fears for those in the multi-family development industry, and while some of it is expected, other factors are more intriguing, like...

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A lack of contractors: especially due to displaced workers and the urgent need for hurricane-aftermath rebuilding. Even when demand for new property is high, and all the ducks are in a row – it's difficult to deliver without enough skilled workers. There were some workers who left the construction industry during the recession for other job sectors, and still other immigrant construction workers who returned to home countries during the recession or following recent natural disasters. The unfortunate repeated blows caused by hurricanes has also created a reduction in the overall pool of construction contractors, as they've been pressed into work in hard-hit areas with less available for standard projects. But there are projects being delivered, such as...

A surge of luxury apartments coming this year: luxury apartment owners fret over new class-A properties poised to become rivals in the upscale-living game. According to stats cited by NREI, there are about 20,000 more apartments opening per quarter beginning in the third quarter through 2018. Many of these apartments are aimed at residents in higher income brackets, which means that some of these units may initially face occupancy problems, but overall developers aren't concerned with long-term vacancy. Although nightmare financial scenarios abound, according to sources in the NREI, somewhat low-leverage construction loans have limited the likelihood of these outcomes for apartment development to lose sleep over. They can worry instead about...

Class-C developments have an affordability problem: rents are maxed out and tenants wages aren't. It's the opposite of the luxury apartment problem, but no less an issue for the lower price tag. Essentially, if there isn't a surge in wages, rents are as high as they can practically go. More affordable apartments must walk a line when determining rental rates: many tenants who occupy these properties are spending their max on housing already and without an influx of cash, would be hard pressed to make their monthly rent after an increase. Although higher-educated individuals did see wages rise, the larger group of non-college educated individuals saw pay rates stagnate – making it hard to justify a rent hike in Class-C properties. Still, this is a fear with a concrete face, unlike...

The unknown future: developers worry about an uncertain future and events which would damage apartment demand or disrupt business. According to the NREI, fears of congressional tax law changes are fairly common across the board. Potential tax code changes that would affect apartment deals are a major concern. Another bogeyman is the politically bipartisan issue of funding that affects tax credit programs. Changes to these credits will affect affordable housing, which in turn affects tenants and developers alike – with urban areas likely to be affected dramatically depending on the outcome of any future legislation. Developers will have to wait and see how potential tax-law (and other) changes turn out in reality.

The multi-family field isn't for the faint of heart and the current climate can raise developers' concerns. Yet even with a variety of factors and fears to overcome there is still high demand for units and several demographics looking to relocate or downsize, creating the opportunity for success. Check back for how one major employer is tackling the wage problem we mentioned leads to Class-C affordability problems in our upcoming blog: Target Banks on Raising Employee Wages

Elizabeth Wheeler