New York Times
POSTED: 1:30 a.m. HST, Dec 7, 2012
Houston is better known for urban sprawl than dense apartment living. But as part of a national rush to capitalize on rising rents, developers there are building thousands of apartments like those south of downtown at Camden City Centre, where 268 units will open early next year in a complex that also has two swimming pools, billiards tables, a coffee bar and a fitness center.
As residential building recovers from a near standstill after the housing crisis, much of the momentum is coming not from subdivisions with green lawns and two-car garages but from rental apartments. Multifamily construction nationwide is two-thirds of the way back to its prerecession peak, while single-family home construction is still only about a third of the way back to its peak, said David Crowe, the chief economist of the National Association of Home Builders.
The multifamily construction recovery, fueled by young people who are striking out on their own, is strongest in the South and West, particularly in markets where job growth is picking up. Last month, the Commerce Department released data on new construction that showed apartment complexes were going up at the fastest pace since July 2008.
That has led to a fear of overbuilding. While rents are still rising, analysts say the steep increases between 2011 and 2012 are unlikely to be repeated as a surge of units are completed in the latter part of this year and will continue to come on the market early next year. Nationally, residential rents rose 4.2 percent in 2011, but only 3.6 percent so far this year, according to Axiometrics, a Dallas-based apartment market research firm.
Much depends on the fortunes of the job market, which industry analysts said will determine whether higher rents are sustainable.
"The real test is going to be what happens between now and April or May as we see all these new units introduced to the market," said Jay Denton, the vice president for research at Axiometrics.
Still, vacancies remain extremely low and the pace of building in recent years has not been quick enough to replace obsolete, decrepit or demolished units, Crowe said. He projected that it would be several years before supply was back to normal.
In Houston, from January to September, construction permits for multifamily housing increased by more than 70 percent over the same period a year earlier, according to data compiled by the homebuilders group. Permits for single-family homes, by contrast, increased by 25 percent. Shares of Camden Property, the real estate investment trust that is building Camden City Centre, were up about 20 percent over a year ago.
"The demand for building is all over the country, really," said Ric Campo, Camden's chairman and chief executive. "We're seeing higher rents, faster lease-ups, lower construction costs — everything you want to see. Part of it is there's just a pent-up demand for new product because we didn't build anything during the downturn."
In Houston, where low housing prices have traditionally kept the cost of living down, Camden can rent a one-bedroom apartment for $1,450.
Houston is far from the only market where demand for rentals is at a fever pitch. Denver, Oakland, Seattle, Miami and Charlotte, N.C., where many of the condo projects that went bust have been converted to rentals, also appear at the top of lists by data collectors like Trulia, Zillow and Axiometrics.
The bulk of the apartments are not going to families who lost their homes to foreclosure, many of whom are renting single-family houses. Instead, the apartments are being rented by young people who had moved in with their parents during the recession, or simply had not yet moved out.
People in their early 30s, the age when many might look to buy a first home, are renting for longer periods of time, partly because mortgages are difficult to come by and partly because they have been unnerved by the turmoil in the housing market.
"That portion of the population is starting to grow again, but I think a lot of them, seeing what has happened, are not particularly enthralled with the idea of going out and buying a house," said Steve Blitz, the chief economist at ITG Investment Research.
New household creation, for example when people move out on their own, slowed to a virtual halt during the recession, but it has begun to grow once more. Even so, there are still roughly the same number of homeowners as there were in 2004, Crowe said.
"All of the net addition to households since 2004 has been in rentals," he said.
To cater to younger customers, Camden and other apartment builders are developing smaller apartments in buildings with more lavish social spaces, Campo said.
Where once 60 percent of the units in a given complex had two bedrooms, now 80 percent have one bedroom, and some units are as small as 500 square feet, he said. Cities like New York and San Francisco are going even smaller, experimenting with microapartments between 200 and 300 square feet in an attempt to meet demand and curb rents. Singles represent a large slice of new demand, said Doug Bibby, president of the National Multi Housing Council, which represents owners and developers.
"They don't want a single-family home with a picket fence in the suburbs," he said.
In fact, Bibby said, married couples with children make up under 1 in 4 households today and will be less than 1 in 5 households by 2020. Experts estimate that rental growth will continue to drive construction for at least a couple of years, although those increases will be tamed a bit as more supply becomes available.
Andy McCulloch, the head of residential research at Green Street Advisors, a real estate analysis firm, said it was a misconception that growing momentum in the single-family housing market would hurt the rental market.
"If the single-family market gets better it could help jobs, it could help incomes and you could see rent continue to rise," he said.
Constraints on lending, McCulloch said, will also keep a lid on the number of new homeowners.
"If I was an apartment landlord, the only thing that would really freak me out from the buying side is the return of easy credit," he said. "But that doesn't seem to be coming back anytime soon."