Multi-family Over-saturation or Good Sign? How about Mixed Use?

Question

Hi all! So, I just ready the Harvard University's recently released State of the Nations Housing Report, and looks like construction of multifamily units is at the highest level since the 1980s! Do you think that means that the market is becoming over-saturated, or is it a good sign that the demand is high and it means that there is great opportunity for developers in that market?

My personal opinion is that lifestyles are changing and people that previously preferred more rural or suburban living are moving to areas more densely populated where jobs are closer-by and more jobs are available. Also to a similar point, with time and efficiency being such huge parts of our lives this generation, living in places where multi-families are most popular, you usually get the benefit of retail and restaurants nearby. Plus, cost sharing on capital expenses like new roof, plumbing, etc. in the future seems to be desirable with the uncertainty of the economy. That being said, while it is definitely expanding quickly, I’m surprised the mixed use development market didn’t come in at a higher number. Could it be because of the extra challenges of financing and managing a mixed use project, or what might be some developers’ hesitation? There is certainly some significant upside to it.

As far as over-saturation, I’m just really not sure what the answer is. I live in Jersey City and the rate of new construction of high rises is crazy, and pricing is even crazier. So, seemingly, there is still great prospect, but I suppose time will tell. It will be interesting to see how well all of these thousands of new units rent or sell once they are completed.

I would never advise a client specifically to invest in commercial, mixed use or residential/multifamily, real estate in general is a great investment if you do it right, but I do like to be able to give some perspective as far as pros and cons of each.

So, what does everyone think?

Paul Moore · Answer

Hi @Jessica Zolotorofe. I agree with @Michael Le. I did a lot of research for a book I recently wrote on the historic shift to multifamily. Though no one has a crystal ball, it appears that the demographics and other factors are pointing toward a massive demand that will not soon be filled. 80 million Millennials plus 76M Boomers, many who are starting to rent again. When Boomers start renting, they rarely return to ownership. Plus significant population growth from immigration, will continue to fuel demand for decades.

Ownership has dropped from 69.2% in 2005 to about 63%, and it continues to fall. Each % drop represents about a million new renters.

New renter households were created at about a 7 to 1 ratio over multifamily supply created during the recession. Buyer/Renter ratio among new households was historically about 65/35, but in a historical reversal, it is now about 25/75.

All this said, real estate is always local, which means that what is true in one geographic location may be completely contrary to another. That is why market selection is so critical.

Like Michael said, I would focus on B/C. Though I have developed successfully, I would not do so again. I plan to stick with Class B & C. Safer hitting singles and doubles than swinging for the fences... with a chance of catching nothing but air.

Chris Masons · Answer

I agree with most of what has been said here... I started out investing in multi family, than as prices for single families and condos became too attractive to ignore i focused on these but as of recently I see small multi family convenient to mass transit into NYC as being the clear winner by way o demand and have moved back to multi family.

Part of this is sure the housing market has gone up steadily in last several years so irbid more difficult to make a good return on single families in NJ but that aside I manage 25 doors and majority is multi family and I clearly see a new demand from younger generation and families I did not see prior. My rents are at all time highs as well. People want convenience and an easy commute to work and less emphasis on luxury of single family living it seems...

Just my opinion,

Chris

Ken Dayal · Answer

@Darren Sager I dream of the NJ Transit you allude to, one that is "on schedule to handle the issue with plenty of volume to spare."

It is no surprise that the NYC metropolitan area, especially New Jersey is suffering from years of neglect of its public transit, roads and bridges. Read Here >> NYT articles on NJ Transit Neglect

You only have to drive the length of Route 1/9 , NJ Turnpike, Parkway, Route 78, Route 3, Lincoln & Holland Tunnels, GW Bridge or any other major roads in North NJ during mornings and evenings to witness paralyzing gridlock. And God-forbid there is an accident or emergency - lines of people at transit terminals and vehicles on roads is mind-boggling. The whole system comes to a complete stop. I know there is research somewhere on number of years we waste waiting - in traffic or in lines for transit that does not function. (NJ transit has taken 5 years of my life)

Our transit system and roads, in its current state is woefully inadequate to handle current demands, much less any growth in numbers. As @Paul Moore pointed out, there is a shift towards living in urban areas. I'm just very unsure of our elected leadership's ability to have a vision towards efficient transit in our urban corridors. What we have instead is Bridgegate, a lethal accident in Hoboken and countless tales of neglect, wasted time and opportunities.

Darren Sager · Answer

NJ Transit is on schedule to handle the issue with plenty of volume to spare. It's not going to happen overnight, but Northern NJ will become one of the best ways to get in and out of Manhattan over the next decade.

Those living right next to the city, might have issues because there's currently no plans (from my research) on adding new train lines such as the Path. Still, most of the jobs are moving into the city, since that's where everyone wants to be.

If Jersey City gets big enough they might have the need to invest in a subway which could really change the outlook of their space. They could blow past Hoboken if they did. The light rail is just not going to be up to the task of moving all those people back and forth. With all the development and additional tax revenue from the added units perhaps their bond rating will improve so that they can easily fund the needed capital improvements to make them into a real estate power house as good as Brooklyn.

Jonathan Greene · Answer

@Jessica Zolotorofe - I work the multi-family market a lot and the influx of investors looking to buy multi-family homes has increased a TON in the last year. This is not just new development, but existing structures are selling way over asking price. I think there are a couple reasons for this:

1. Buy and hold investors in our areas of NJ can make income and then a profit on even a shorter hold than before because of the demand. This is party based on NY transit lines out our way, as well as the comparative value of living in a more "homey" environment of a multi-family than a condo or apartment building (also often more pet friendly with backyard access).

2. The multi-family investor market has been flooded with owner/occupiers who see house hacking as a viable alternative/income producer.

3. The first-time buyer is persuaded by the higher pre-approval with the thought of income in return, but unfortunately, this is producing a lot of unprepared landlords who don't realize they pay 1.5x the price for 1/2 the space (if they live in half) and 2x the responsibilities.

I don't think it's oversaturated, but because SO many NYC people and investors are looking to invest on the train lines in NJ, there is possibly an overestimation of many of the true values of multi-units in my market and nearby.

David Thompson · Answer

Jessica,

Some good tips above. Like Michael and John's recommendation on B/C, specifically properties you can add value to in forcing appreciation. The trends are still solid w/MF as far as everything I read. You still want to focus on : growing markets, solid value add deals and an experienced team or partners to help you achieve your goals. Class A is the most expensive and easiest to get overbuilt. In Dallas for instance we see differences in rents from Class A to B/C of $1K even after renovations of B/C properties so we feel that these properties are a great place for some folks to go to if economy slows or flattens. We had a partner from Houston that is fully integrated (purchases, manages and renovates) their own properties and during the oil crisis that hit a few years ago, occupancy fell off the cliff for Class A but for their 10+ properties, they showed us that their occupancy stayed healthy and actually increased slightly during this period showing the lower beta of this asset class.

William SaintAmour · Answer

And Generation Y is bigger than the boomers, they like urban centers, and they have finally started to get decent jobs. Look for areas with growth in that demographic.

Michael Le · Answer

Hi @Jessica Zolotorofe, from what I've read the construction is the highest it's been but it's still only keeping up with the growth. That means we're just no longer falling behind but we're not catching up so there is still not enough housing. Particularly there is still lack of affordable housing so B & C class properties are still good for investing. And like normal, real estate is local so you'll find areas that are better than others.

Darren Sager · Answer

@Kanishk Dayal I don't put much weight into left winged rags like the NY Times doing their best to knock down anyone who's not on board with their political view. I don't care about Bridge Gate (and with knowledge from a friend of Bridget Kelly I don't put the blame on Christie). I'm not going to bring up how the Democrats in NJ have controlled the state for the past how many years before Christie and didn't get anything done (so don't be naive thinking it's all on him). I'm not talking about the roads but specifically the trains. The shift that people are moving to urban areas is not new. It's been going on for the last decade. If you're just finding this out only recently you need to find other news sources outside of the NY Times.

What I do know is the major issues of the volume of trains going in and out of Manhattan should quadruple once the Gateway Project comes online over the next decade and they replace the Portal Bridge (which breaks down quite often). That's what I'm betting on. If you don't know about the project (& ARC before it) and how it's going to effect Northern NJ you're late to the game (and it goes all the way back to before Christie first took office).

Jeff B. · Answer

This is the urban city planners nightly prayer - - get people living WHERE they work. Some locations this would work much better than other, eg Eastern cities with large populations PLUS a commuting infrastructure. The best mixed use would be owners/works above their jobsites - - lots of infrastructure need to pull this off (shopping, dining, entertainment) and that mix is rare. Perhaps Detroit will have a chance as it restructures.

Los Angeles is a freeway nightmare from lack of commuting services - - we're still attempting to interconnect the rail and airports. Too little, too late, too inconvenient, and takes too long to arrive.

Summary: Mixed Use imo is totally dependent upon the infrastructure.

Multi-family Over-saturation or Good Sign? How about Mixed Use?

Multi-family Over-saturation or Good Sign? How about Mixed Use?

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