Is new multi family development a good sign to invest in an area?

Question

Is an area with a lot of new development of both small and large commercial multi family projects a good or bad sign to invest in that area? I’m particularly interested in small multi family investing. On the good side, it shows the demand for rentals in that area and also seems to be a sign of an up and coming area. On the bad side, the influx of rental supply is direct competition.

Shawn Mcenteer · Answer

@Adam F. are you looking to invest in NJ?  I believe NJ, North Jersey in particular is very unique when compared to other area trends. North Jersey has a huge demand for rentals, particularly area with direct access to NYC.   MFR 4 units and smaller do very well if done right.  Vacancies tend to be low, rent high.

Adam F. · Answer

@Shawn M.

Yeah actually, personally I’m referring to Jersey City but also interested in the New Brunswick area which is showing a lot of new development

Taylor L. · Answer

There's a saying - "Cranes in the air, beware"

You're right, that new development is direct competition. However, most new developments are A class product, asking the highest rents in the market. If you can be the lower priced competitor (and stay that way) you have a good chance of always being full.

If that new development is charging $1,200 for a 1 br, can you charge $900? $1,000?

You need to get deeper into the numbers. Some markets and submarkets are overbuilt and in hypersupply mode. Richmond VA, where I live but do not invest, has a few submarkets that are absolutely in hypersupply mode. However, lower priced properties are on and off the market almost immediately, because college students don't have bottomless pockets.

In short - you should analyze the situation a bit more deeply. Do you actually have a competitive advantage over the big new guys, in that you can charge lower rents and stay occupied? It's expensive to build new large multifamily. That's a disadvantage on their side.

How many units are coming online, how is the local population growing, and what are current vacancy rates?

Adam F. · Answer

@Shawn M. Also prices are high along with the rents so although vacancy is low, I’m having troubling finding some good cash flowing deals

Jay Hinrichs · Answer

I don't know if this relates to today.. However I worked for a bigger syndicator in the mid to late 80s in charge of their land development projects SFR  ..  they had about 200 plus MF properties in northern CA.. SF and Sacramento and in between

they got the grass Is greener bug and cap rates are higher bug and decamped to Dallas and bought two bigger older complex's that ran well for a few years..  Well I think it was well documented in those days all you need was money and desire in that city/state and you could just build what you wanted.. well a few new buildings came up.. rent specials were offered.. tenants left the old buildings for the new buildings  to the extent they could not cover 1.25 rent coverage and long story short they lost them both.. Not sure if this is applicable todays market.. as in lead time to get anything built in many markets is 2 years plus a year or more to build it.

Taylor L. · Answer

@Jay Hinrichs from conversations with brokers, they've been seeing that kind of competition happen in Charlotte with all of the new construction there. I think one of the mitigating factors in this case is @Adam F. is talking about small multifamily.

So if he's talking, say 7 doors, he'll have fewer units to keep full.

Agreed, though, there is definitely risk here. Oversupply is a problem when it happens.

Adam F. · Answer

@Shawn M. That really makes sense. As a new NJ investor it can be discouraging hearing the types of returns people look for and seem to get in so many other parts of the US, and often talking down on low cash flow as if it's a "bad deal". I'm really trying to figure out the best strategies in the NJ markets so I'm not constantly searching for the seemingly rare high cash flow properties and overlooking other opportunities.

Shawn Mcenteer · Answer

@Adam F.  Cash flow is great but there is also a growth side to NJ investing.  Many markets in NJ see consistent rent increases.  With the vacancies being low it allows you to buy a property with little or low cash flow and see a significant increase in rent within a few years.

Allan Szlafrok · Answer

@Adam F. As long as there is a retail or Commerical component to the development it’s usually a good thing. Anything that brings new bars, restaurants, businesses,  and jobs to the area is a good sign. That’s the case on the west side of Jersey City where I own a few multi family properties. All the apartments going up are luxury apartments asking several hundred dollars more a month than I ask so I’m not directly competing with them as they are drawing a different kind of clientele than I do. However my tenants will be able to take advantage of some of the new amenities the development will bring so that’s definitely good. It also helps improve the reputation in the neighborhood and will likely increase overall rental demand and prices in the area. So I think development in your area is usually a very good thing unless you are competing directly with the new housing stock going up.

Kevin Dean · Answer

@Taylor L. and @Jay Hinrichs this is a great conversation.

In your experience, have you been able to get solid information on new deliveries in a submarket you are investing in? If so, how have you been able to get that reliable information?

After receiving that information, how do you go about factoring in the effect of those new deliveries on pro forma vacancy/rent growth/etc.?

Interested to hear how you think about this, thanks.

Is new multi family development a good sign to invest in an area?

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