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Apartment Builders see Uptick in Market

Changing demographics and new economic realities are driving more people away from homeownership in the suburbs and into rental properties and apartments in many areas around the country. This surge in rental demand is leading to an uptick in apartment construction, and opening doors for insurance agents and brokers.

For one Dallas based insurance broker, the demand for multi-family building projects has been like a mini-boom.

“Our demand in Dallas for builders with some multi-family is up probably about 50 percent in our office,” said Anne Sheahen, a partner at Hotchkiss Insurance Agency, an independent insurance agency headquartered in the Dallas area. While Hotchkiss Insurance Agency’s Houston office hasn’t experienced the same surge in growth in multi-family construction as in Dallas, Sheahen says there’s been a slight rise in apartment activity in that area as well.

The demand for apartment living is attracting more contractors and builders to the multi-family construction arena, Sheahen says. “We are seeing builders that were specialists in single-family developments, moving to create joint ventures with those experienced with multi-family construction.”

In a modern day construction industry where “flat” growth is the new “up,” contractors and their insurance brokers welcome the recent rise in apartment building.

“Our producers and staff here — we’re writing a lot of multi-family construction,” Sheahen said. And that’s a good thing, she says.

Vito Gaeta, director of specialty construction program at NSM Insurance Group, also sees more focus in the commercial construction industry on building apartments.

Gaeta says he sees apartment building activity along the northwest. “We’ve seen an uptick in Washington and Oregon, but especially Washington for apartments,” he says.

California is also seeing a rise in apartment construction, a trend driven mostly by the economy, said Jett Abramson, senior vice president and director of complex casualty for Bliss & Glennon Inc. in Redondo Beach.

“There are a lot of people that are leaving the single-family, custom homes that they built and bought four years ago,” Abramson said. Maybe those homeowners lost their homes in the recent financial crisis. Maybe they decided to rent to save money. Whatever the reason, they have to live somewhere, he said.

Right now, Abramson sees the biggest demand for high-end, luxury apartments — at least in Southern and Northern California where he sees a lot of apartment building activity occurring.

“If you’re moving out of a nice, new home, moving back into the apartment market, you probably want a nicer apartment,” he said.

At the same time, there’s a lot of low income housing going up all over California, he added. “That’s all driven by tax rebates, subsidized housing credits, etc.”

“Just last week here, just on my team, we bound five apartment projects. They were all new construction,” he said.

Although she remains cautious given the turmoil in the industry the past few years, Sheahen sees the new construction in the multi-family market as a positive development.

“We really feel that we’ve at least turned the corner,” Sheahen says. “We are very encouraged by what we see coming through the pipelines from builders. Many of the builders are still in business. They have not gone out of business. We have not lost very many customers. It’s just that the exposures are way down. We’re seeing, where we would see returned premium audits in 2009 and 2010 to get payroll exposures or sales exposures, in 2011, audits were pretty much less.”

Gaeta says it’s nice to see some activity — even if insurance prices continue to remain soft — in the construction industry.

“It’s soft but there’s activity so it’s a nice change from the rest of the market, which is soft but there’s no activity,” he said.

Sheahen doesn’t expect to see a huge surge or spike in construction this year, but increases, especially in multi-family construction, are positive.

The Move to Rent

The boom in apartment living nationwide has been fueled by both shifting demographics and tough economic realities, says Douglas S. Culkin, president and CEO of the National Apartment Association (NAA).

One-third of Americans rent their housing, and nearly 14 percent — 17 million households — call an apartment their home, according to NAA.

“From the demographic standpoint, certain population segments prefer renting, such as Echo Boomers who are starting to enter the housing market and Baby Boomers who are beginning to downsize,” Culkin told Insurance Journal.

The apartment industry has changed to meet the rising demands of young professionals, empty-nesters and single parents who want the conveniences, amenities, shorter commutes and financial freedom that apartment living promises, Culkin said.

“Today’s apartment communities are vibrant destination living communities, with gyms, park-like settings, multiple pools and proximity to upscale retail shops, restaurants and entertainment, and access to public transportation,” he said.

In this decade, renters could become half of all new households — that’s more than seven million new renter households. Additionally, Culkin says a leading researcher predicts that half of new homes built between 2005 and 2030 will need to be rental units to meet the demand.

“From an economic viewpoint, demand for rental housing at mid-year 2011 reached a multi-decade high because people simply can’t afford the risks of homeownership,” he said.

NAA conducted an online survey with independent research firm Harris Interactive in November and found that people prefer renting for many reasons, including: to avoid an unpredictable real estate marketplace, susceptibility to foreclosure, and increases in their mortgage rates. People also prefer renting because it provides freedom from expensive maintenance and repairs, attractive amenities, and greater mobility to pursue job opportunities.

Culkin says his association found growth in apartment living is projected to be highest in 2012 in San Francisco, which was the number one market in 2011; and Austin, which could surpass San Francisco in 2012. They’re followed by San Jose, Oakland and Boston, with the next tier being New York City, Dallas, Charlotte and Houston.

Troy Wright, a producer for Watkins Insurance Group, an independent agency based in Austin, Texas, hopes lenders will ease up funding so more apartments can be built to meet the rising apartment rental demand in Austin.

“In the Austin market rents are going through the roof because of the lending situation — because people couldn’t get money to build projects, there’s a shortage of rental space,” Wright said.

“The key is getting the lenders to loosen the purse strings on the money,” he said. “That’s exactly what has caused, in my opinion, the lack of additional apartment space in the Austin area and is what’s causing rents to go through the roof. Had lenders made money available then people would have continued to build apartments, met the need, and the rents would have stayed more stable.”

Better Financial Backing

An improved financial market for project starts is one reason for the recent growth in apartment building in some states.

The capital to build is back in the apartment market in California, Abramson said.

“A year and a half ago, if you wanted to build anything you had to go to the hard money market and pay enormous interest rates. Now, we’re seeing the commercial lenders get back into the development market space, and many of this has been on commercial development and apartment development. Not so much unattached residential,” Abramson said.

“People that we’re seeing now building the apartments are the same clients that we’ve seen build numerous apartments over the years. Now there’s more availability of capital to actually build.”

From Wright’s point of view, things are beginning to loosen up for some contractors in Texas as well. “People who couldn’t get money to start projects two and three years ago are starting to get some funding now. That is the key,” he said.

Despite the improved lending environment for new apartment construction, multi-family construction starts remain below prerecession levels, said NAA’s Culkin.

“Although the failing housing market has led to renewed demand for rental housing, uncertainty in global financial markets has hindered the availability for financing new rental construction and where there has been new construction, it has been fairly limited,” Culkin said.

“Most investors are interested in existing properties in major metropolitan areas, such as New York City, Los Angeles, San Francisco, Boston, Chicago and Washington, D.C. — well-located, good quality properties that will yield a quick return. It is more difficult to obtain financing in smaller markets such as Pittsburgh, Cleveland or Indianapolis because these projects carry more risk.”

Hotchkiss’ Sheahen has seen traditional single-family builders, who were more volume builders, move into either multi-use construction -apartments with retail on the first floor — and also into apartment building.

“You’ve seen it in Austin, but in Dallas — especially in 2011 — many of those builders have gone into joint ventures to build multi-family,” she said.

Culkin agrees Dallas has been a hot spot for new apartment construction, and also cites Washington, D.C., and Orange County, Calif., as areas with a lot of new construction activity.

In line with the recent trend, the Commerce Department said recently that construction starts in the multi-family sector in November increased 25.3 percent from the previous month. But despite the growth, Culkin believes new supply levels will be only slightly higher in 2012 than 2011.

Even so, the need for apartments has attracted commercial real estate developers into the apartment business, where greater demand exists more than any other sector, Culkin added.

NSM’s Gaeta expects market competition to increase given the boom in apartment building in some states.

People who have focused on commercial building are going to flock to the next cool thing — apartment building, Gaeta said. And “anybody that’s ever written a residential homebuilder will try to write a commercial apartment builder because that’s where the money is,” he added. “These guys are getting the funding, and quite frankly, have the ability to pay the premium.”

Hotchkiss’ Sheahen sees apartment building continuing on an upward path, even if at a slow and steady pace.

“We definitely see a steady increase,” she said. “The builders that we write that specialize in apartments and multi-family, mixed-use, have contracts in their pipelines. They’re expecting better results, even better than 2011.” And that’s a good thing.

Topics California Washington Construction