August 2016 — Multifamily Properties Quarterly —
Page 31
as they did before the housing crash
in 2007.
Two other facts should be pointed
out with the provided multifam-
ily numbers from the U.S. Census
Bureau. Apartments as a percent-
age of multifamily units counted by
the Census Bureau have increased
because of decreased condo con-
struction with condo defect litigation
risk; and the percentage of housing
units that are multifamily units has
increased since 2007. Before 2007,
multifamily units made up 31 percent
of housing permits; multifamily units
now make up 47 percent of building
permits. Because of increased scarcity
of overall housing units and supply-
side substitution in the marketplace,
we can see how supply-side econom-
ics can support the argument for a
new normal in the Denver metro
area absorption numbers.
The experts we spoke with
pointed to many contributing rea-
sons why absorption numbers are
currently higher than in the past.
These include:
• Delayed age for marriage
increasing.
• Delayed age for having kids.
• Millennials moving out of their
parents homes.
• Baby boomers downsizing.
• More divorced and dual house-
holds.
• Qualifying for a down payment.
• Student debt burden on potential
home purchasers.
• Lack of affordable housing.
Apartment absorption, including
affordable units, has averaged 8,000
units per year for the last several years,
according to Bruteig.With several
quarters within the past couple of
years reaching new all-time record lev-
els. Developers, investors and market
participants all hope these new higher
apartment absorption levels will con-
tinue.
We hope we laid out a solid argu-
ment for a new normal in apartment
absorption. Historically, the third quar-
ter is the strongest quarter for the met-
ropolitan area for apartment absorp-
tion, so we look forward to seeing
what the marketplace does during
this summer-leasing season.
s
Blackshire
tion exemplify any trends you’ve
observed with respect to multifam-
ily properties in the area?
Answer:
Transactions are few and
far between in the high country, so
it doesn’t exemplify a trend, per say.
What it does demonstrate, however,
is that if an apartment property
listed for sale in a mountain resort
community is marketed correctly,
even in Leadville, it will attract sub-
stantial investor interest and gener-
ate multiple offers. It really high-
lights how mountain apartment
properties can be strong multifam-
ily investment vehicles.
Question:
What is the outlook for
multifamily properties in Colorado
mountain resort communities with
respect to supply and demand and
construction?
Answer:
On a supply level, the
biggest issue that arises with new
proposed developments is that con-
struction costs can be 30 percent
higher – or more – than in Denver.
These higher costs are due to fac-
tors such as lower population den-
sity and fewer viable development
locations. Another impediment to
new construction is the shorter
building season, which is the result
of heavier winters.
The point is, the threat of new
construction is minimal, if at all.
Even if a few apartments are added
to the inventory, the issue of insuf-
ficient supply will still likely persist
for the foreseeable future.
Question:
Would you say that
because of these persisting issues
rents and property prices will con-
tinue to rise?
Answer:
Yes, I believe they will
continue to rise. That said, it is
important to keep in mind that the
average apartment renter – say in
Summit County, Vail Valley or Eagle
County – could be priced out of the
area if rents increase too much, too
fast. Already we see some income
levels being priced out. It’s a classic
supply-and-demand issue.
s
Price
struction activity, construction costs
and lender-risk appetite. Such a new
equilibrium would make it less likely
that we will someday talk about
2017 vintage deals in the same way
we talked about those from 2007 or
loans from the same.
In looking at past cycles, construc-
tion usually increases into the end of
a cycle. Then the pipeline of projects
previously green-lit and under con-
struction deliver to the market dur-
ing the downturn. These increases
in supply while absorption is muted
or negative make the trough deeper
and longer. Supply dynamics are
reacting approximately 18 months
behind changes in demand, a lag
that not only amplifies real estate
cycles but also is a main cause of the
cyclicality in real estate markets in
the first place.
Downturns are worsened by new
supply deliveries and recoveries are
pumped up by a supply pipeline that
has abated. If the prognosticators are
correct and the downturn is around
the corner – and absorption declines
while the 23,000 additional units in
the pipeline come to market – it will
matter little whether it was June or
October when financing markets
decided to recoil. But in looking at
the current state of the market, if the
downturn is not immediately around
the corner and if multifamily starts
decline for some time, what will the
next downturn look like?
With developers less likely to build
new projects, the recent increase in
multifamily starts looks unlikely to
persist. Not only does this make us
feel good about the projects we are
building currently, but also it may
be the case that developers who
succeed in breaking ground on new
projects in 2016 and 2017 are not
necessarily lemmings headed toward
a cliff.
While my career in real estate
does not span many cycles, I do not
remember industry pumping the
breaks in the mid-aughts like it is
now, nor do I remember so much
talk of baseball. The question may
be, if the current dynamics of the
lending markets persist long enough,
the supply pipeline adjusts and the
market fundamentals show stabil-
ity in the meantime, will we find
ourselves searching for a new sports
analogy?
s
Cason
which all conclude controlling rents
have the opposite effect of provid-
ing affordable housing because it
disrupts the supply chain as well
as leads to neglected housing due
to insufficient revenues needed to
cover operating cost and capital
improvements, according to the
National Multifamily Housing Coun-
cil.
Sure, local officials can say they
will make the landlord keep their
buildings maintained; however, at
some point, a landlord will shutter
his building if he cannot achieve
a reasonable rate of return on the
investment, which removes housing
units from the marketplace and dis-
rupts the supply chain.
Artificial adjustments to address
the cost of any product have proven
over time to be a failures, especially
when state, regional and local public
officials are not willing to take the
time to really understand the hous-
ing needs, recognize unintended
consequences or prepare a well-
thought-out business plan so the
true goals are met. Without goals
being met through well-considered
housing plans, we will end up with
the same failed policy the IHO has
produced with only 82 affordable for-
sale units in 16 years.
s
Brockman
market-rate project and are as fol-
lows:
Development team
• Developer
• General contractor
• Architect
• Attorney
• Accountant and tax consultant
• Property manager
• Consultants
Lenders
• Construction lender
• Permanent lenders
• Lender attorneys
State housing finance agency
(works with)
• Syndicator
• Underwriter
• Fund manager
• Attorney
What are the benefits to private devel-
opers?
The opportunities for develop-
ing affordable housing are numerous,
not the least of which is the ethical
construct of conscious capitalism,
which states, “One can do well finan-
cially by doing good.”
Other more specific points include
the fact that 8 to 15 percent of the
developer fees are up front at the time
of development and, after 15 years, the
developer owns the property rights
free and clear and either can refinance
the debt or sell the property to others
who invest in affordable housing proj-
ects.
The program offers essentially free
equity for the project via a tax-credit
program that realizes 10 years of tax
credits paid up front to fund the devel-
opment. Developers are required to
put down little to no equity, and they
receive before-tax cash flows after
expenses. And, occasionally, free land
for the development of affordable
housing is available from local sources.
Developers also receive a portion
of property management fees and
there are low-debt requirements after
the tax credits and other soft funds.
Additionally, nonrecourse funding and
the reimbursement for initial project
expenses is available, which include
upfront costs to put together the
application for submittal to the state,
architecture and engineering feasibility
studies.
The road to getting all of your docu-
mentation in order for LIHTC is no
easy feat because the rules are com-
plex; however, the benefits outweigh
the obstacles.This article is intended
to highlight the opportunities, how-
ever a much deeper analysis of the
rules and regulations governing LIHTC
projects is critical in determining if
this development strategy is right for
you, which is why an experienced
team of design, tax and legal profes-
sionals is imperative to your project
success.
s
Puncerelli
LAI Design Group
The need for afforable housing is greater than many realize.
