5.6 million cheap apartments - not for long

6 Replies

I just read this article on Bloomberg and wondered what others thought about it:

http://www.bloomberg.com/news/articles/2016-10-31/there-are-5-6-million-cheap-apartments-in-america-not-for-long

All the rage in rei these days is buying these apartments, fixing them up and raising the rents. It makes me wonder where all this is heading.

My own small town is a good example. New class A apartments are being constructed for around $100k/unit $1000+ monthly rent. Nothing less expensive than that is economically feasible to build. The local housing authority/builders getting tax credits are adding some stock. But I read the other day they're spending about $150k/unit on construction.

Here, a good affordable 2 bedroom apartment is around $500/month. Demand for them is very high because it's economically impossible to create any more of them.

The most interesting thing to me in the article is the chart showing when most of the apartments were built, the 60's and 70's during baby boomer times. We're just starting that with the millennials so that says a whole bunch of apartments need to get built and everything else being equal average rents should continue to climb... 

They are building a lot of large apartments near my area also. Partly because there are shortage of housing here and driving up the rent. A cheap studio is going for 1800/month!

@Jeff Kehl I read this article this morning as well, thank you for sharing!

I think most places throughout the midwest are seeing the same thing happening. I think if we look at the math on a high level this will continue to happen (why would I buy an investment to lose money). However, all things are not equal. Most apartment dwellers in this country will not be able to afford rates going up as income stays stagnant. This, to me, means one thing. The government will step in in some form or another to control the situation. Whether that means subsidies or rent control I am not sure, but it is a question we should be trying to answer now rather than later. 

I would be very interested in hearing other opinions on this topic.

Great article, thanks for posting it! It will be interesting moving forward to see how/when units are added to the national stock. There seems to be some unreasonable group of factors that are forcing builders to only add housing at the very top of the rent scale. My question are:
1. What factors are causing the issue of high building prices?
2. Which of those factors will change in the short term to make more construction feasible?
3. Could there be an unforeseen drop in rents, and what would be the impact on over-leveraged investors who have 50 units which originally cash flowed $100/month, but after a rent shock sets the investor back $100/month instead?

Jeff,

Our experience has been that adding appropriate renovations for a submarket is what local governments support.  They love to see investors come in w/the right experience, plan to renovate the interior, exterior and improve management to clean up and make safer the older apartments in their community that often become an eye sore or attract the wrong residents.  When renovations are completed on these older apartments, rents are raised to make an attractive enough return to investors to invest their money that creates a better and more attractive apartment community. Sense of pride returns, good property managements as well often come in w/significant experience wanting to create a real community.  Organizing social events to build cohesion and sense of community, great for the neighborhood / city, great for the investors in things like resident retention / reducing turnover. We see a large % of current residents opt to pay 10% more over a two year period when they see an updated refurbished apartment.  Most want to stay in their community, schools, jobs and friends / connections that they've made.  We view value add apartments as an overall good thing win/win.  

I get tons of calls a month looking for the stuff. I just do not focus on it as much these days and spend more of my time on commercial assets.

Had a call today for a guy looking for Class B stuff at an 8 cap. I politely told him that was 2 years ago. Some investors are not even in tune with the markets. 

Class A is being overbuilt in many markets. Developers want class A because they can charge high rents and the more affluent type renters their rent to income ratio is low say 10 or 15%.

Section 8 is the government subsidy so even if the tenants do not have it the landlord is collecting the check for the most part.

The middle class is what is peaking. These renters some are at 40% of income to monthly rent and you simply can't push rents much further on them.

For the cap rate stuff is trading at today I am not interested but others love it. Many investors are just going in with blinders on are at least over enthusiasm that the market will keep it's torrid pace for years and years to come.  

@David Thompson I'm not saying renovating and raising rents are a bad thing. I'm doing that myself on two smaller properties and looking for something larger to syndicate. So many people would not be doing it successfully if the market wouldn't bear it. 

I'm just interested in what it means for the overall economy. I think, as @Joel Owens suggests, this is more of what we see broadly in the economy. There are new or renovated apartments for people at the upper end of the income scale and at the bottom with government assistance. Those getting squeezed are those in the middle because the $500 (or whatever is affordable in your area) 2 br 1 ba affordable apartments for working families not on government assistance will continue to disappear.

I've often wondered how rent growth could continue at the pace it's been at when incomes are not keeping up. I think the answer in that story is that they HAVE to other wise no new apartments would ever get built/rehabbed. 

What other factors would have to happen to cause people to pay closer to $1000/month for their apartment is what I'm wondering about. I think it could be a lot of inflation or it could be more people on government assistance or maybe even real wage growth.

  

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