Millennials Power Multifamily Market
OC rental rates are following the adage of slow and steady wins the race. But as developers look to put up new product, Millennials will call the shots. At least that's what speakers at Bisnow’s Orange County Multifamily Financing & Development event at the Balboa Bay Resort Friday had to say.
Sares-Regis president Chris Payne and KeyBank Real Estate Capital VP Robert Prouty. Our speakers say Millennials will be the driving force in multifamily for many years, and are--and should be--the focus of developers. Many Millennials may look to buy at some point, but many more never will. Also, developers shouldn't forget the Baby Boomers. They’re going to be another source of strong demand for apartments for years to come. They want much more than shelter, they want an experience.
Rental growth has been slow in the market, but panelists say that may be a good thing. NorCal rents are the hare and SoCal rents the tortoise. Markets such as Silicon Valley have enjoyed near-double-digit annual increases in recent years, but that growth’s likely to peter out before too much longer (and maybe grind to a halt). OC, on the other hand, might be experiencing slower growth, but it’s going to last longer. So all things considered, annual rent growth in OC might be about 3% to 4% in the next few years.
Irvine Co president Chris Marsh and Mill Creek senior managing director Samuel Simone. Construction costs in the area have seen low to high single-digit increases, according to our speakers, that’s another reason it’s a little tough to get development deals done (though it isn’t quite like Northern California, where costs have been escalating more rapidly). Also, there’s some renewed competition from condo developers, but not with the same vigor as in the last cycle. Conversion remains muted mainly because it’s harder for buyers to get mortgages. But as Millennials form households in greater numbers, demand for condos will return—because some of them do want to own.
Walker & Dunlop VP Mark Grace and TruAmerica senior managing director Greg Campbell. Finance agencies have became more aggressive since last spring, and now there’s lot more variable rate and shorter-term debt available. Freddie Mac in particular has ramped up new programs and is trying to outdo Fannie Mae for the first time ever in volume--and it looks like Freddie just might this year. All together, it’s still a great time to be a multifamily borrower, in an environment of low rates and flexible products. Multifamily still performs relatively well and remains the darling among investors.
Allen Matkins partner Matt Fogt, who moderated. The drive to include better amenities is something of an arms race. Large communities have everything, while smaller ones have trouble keeping up. Developers have to provide a level of amenities at or better than their competitors in the same submarket, and it isn’t just pools and gyms and other features--it’s about creating a lifestyle. Today's renters expect it. Student housing is actually leading the way, since expectations are set when residents are students. When those graduates come to the rental market, properties have to offer similar sorts of amenities to compete.
