Not long ago, renters with plenty of disposable income typically moved into garden-style apartments in the 'burbs. These days, fancy high-rises and lofts are luring residents intown, not only in traditional “24-hour cities,” but major urban centers from Charlotte, N.C., and Atlanta toand Houston.
Who's moving into these luxurious high-rises? Echo Boomers. But if you haven't heard of the “Echo Boom” yet, don't worry — you will very soon. These children of the baby boomers, born between 1965 and 1986, have set out to transform the multifamily sector.
“The Echo Boom is the new force in rental housing,” said Ron Witten, president of Dallas-based Witten Advisors.
He reasons that the Echo Boom generation, influenced by cultural images such as the high-rise life glamorized on TV shows like “Friends,” and the hip grunge fashion of urban neighborhoods, will prefer intown living.
The urban living trend began more than a half-century ago in 24-hour cities, most notably New York and Boston. Here, the urban fabric of a live-work-play environment developed ahead of other places in the country because land within these urban centers was both cheaper and more plentiful in the mid-1900s than it is today.
As the country's population migrated westward, intown living also became popular in other major cities like, San Francisco and Los Angeles. Then Post-World War II America embraced the concept of “a plot of land to call one's own,” which fueled a migration out of downtown and gave birth to the suburbs.
Only in the 1990s did the suburban trend begin to reverse itself. “The long-standing demographic trend in the U.S. has been suburbanization,” according to Mark Obrinsky, chief economist at the Washington, D.C.-based National Multi Housing Council. “The attraction of living in or near the downtown cores of cities like Boston, New York, Washington, Chicago, San Francisco and others pulled people back from the outer fringes of the metropolitan area.”
According to Obrinsky, demographic and lifestyle changes strengthened the trend. “In particular, young professionals and empty-nest baby boomers wanted to reduce their commute times and be free of homeownership chores — from cutting the lawn and shoveling snow to fixing the roof and having to rewire the house for high-speed Internet. The trend became particularly noticeable in the second half of the decade,” Obrinsky said.
The current standard
Today, high-rises are the most common urban developments. The two other intown apartment styles are lofts and garden/townhouse, said Richard Burns, a principal in the Boston office of New York-based Lend Lease Real Estate Investments. “There has clearly been an urbanization of multifamily housing in the U.S. The question is, will it continue and in what form?” Burns asked.
Major multifamily real estate investment trusts (REITs), including Atlanta-based Post Properties and Alexandria, Va.-based AvalonBay Communities, are driving the newest development. These firms have been the most active public companies in building urban communities and are in the midst of tackling several more urban apartment developments.
For example, Post broke ground in August 2001 on its first major project in New York, the 20-story, $51.5 million Post Luminaria at 385 First Ave. in Manhattan. But because of the city's high barriers to entry, it has taken Post several years to break ground on the building in a joint venture with Clarett Group of New York. Post also has started major urban developments in Washington, D.C., Charlotte, Atlanta, Orlando, Fla., Tampa, Fla., Dallas, Houston, Denver and Pasadena, Calif.
“What we've tried to accomplish over the years since the company went public is diversify our asset base into those markets that are tougher to develop in,” said David Stockert, president and COO of Post Properties. “That could be an infill market in Atlanta like Buckhead or Midtown, or a tougher-to-develop infill market like New York or Washington, D.C.”
Likewise, AvalonBay has been on an urban building spree. It started with the $50.1 million, 203-unit Avalon at Gallery Place on the east side of Washington, D.C., which is set for completion during the fourth quarter of 2003. The company also completed a $34.6 million redevelopment of 294 units in its Avalon at Cortez Hill property in downtown San Diego in July.
The cost of intown developments has skyrocketed, limiting their economic viability. “Over the past several years, a number of apartment investors recognized a direct link between owning buildings in supply-constricted markets and the ability to achieve higher-than-average returns,” said Linwood Thompson, national director of Marcus & Millichap's national Multi Housing Group in Dallas.
Going forward, one of the biggest shortages in American housing will be in the affordable arena, according to Howard Levine, president and CEO of Calabasas Hills, Calif.-based ARCS Commercial Mortgage. “Obviously, some developers are going to get a little nervous about the high-end product” because fewer people will be able to afford high-rent units in a slowing economy, Levine said. “So that [affordable housing] sector is going to perform extraordinarily well.”
Another popular kind of project is the conversion of older buildings. In particular, Levine said smaller projects, such as loft conversions of industrial buildings in downtown Los Angeles, will be successful. The company also has converted three buildings in the Wall Street area of Manhattan within the last year. “These are within walking distance of the work areas,” he said.
Coming to a city near you?
Big cities haven't completely cornered the market on urban housing activity, however. Non-traditional and “second-tier” cities have even embraced the urban living trend. “Intown housing development is happening in essentially every mid-size to large city in the country. It is not limited to the traditional 24-hour cities,” Witten said.
According to Kevin Geiger, head of the CB Richard Ellis multifamily housing properties group in Atlanta, as adults who grew up in major cities and infill areas enter the workforce, they are migrating to other cities desiring to live in infill locations. “It's what they know and are comfortable with,” Geiger said. “Culturally, the nation as a whole is more accepting now of people with diverse backgrounds.”
Geiger cited several examples, including Valdosta, Ga., population 40,000, which is redeveloping its town square in an attempt to lure more businesses and residences. In addition, a small- to mid-size city like Louisville, Ky., (population 250,000) has completely redeveloped its downtown area and made it much more appealing to the general population by removing the scrap metal junkyards that previously lined the banks of the Ohio River, he said.
“Today, condos and upscale apartment communities overlook a park along Louisville's riverbank and the Ohio River. Now the city is trying to lure a NBA team to further strengthen its downtown economic base. There has been a major revitalization there,” Geiger said. Political and business leaders have realized that a city must create a “draw” to its infill locations to sustain its economy. Ideally, this can be accomplished by using empowerment zones or areas where investment is encouraged by massive tax breaks or building a sporting venue in the urban core, according to Geiger.
“The city of Atlanta, in the late 1980s and early 1990s, actually had negative population growth,” Geiger said. He noted that few cities are able to survive when their tax bases and revenues begin to deteriorate, but that trend was reversed in Atlanta because of developments such as the Georgia Dome, Turner Field and Phillips Arena sports venues. Single-family housing and apartment communities were included in the mix of each of these developments, drawing residents back to the city's core, he added.
But the multifamily infill trend is not popular everywhere, emphasized Michael Hanrahan, vice president of St. Louis-based Colliers Turley Martin Tucker. Hanrahan said the intown housing trend began in the early 1990s in St. Louis, but represents only a small percentage of the housing growth occurring in the metropolitan area. He said the trend is less pronounced in St. Louis because it lacks the amenities of 24-hour cities and has a lower population density than those cities.
In fact, Hanrahan predicts that the bulk of future housing growth in St. Louis will take place in the suburbs.
“Intown housing will be viable here but it will continue to be a relatively small niche market, catering primarily to empty nesters, and couples and singles without children,” he said.
Burns of Lend Lease agreed that there are limits to how successful infill urban apartments can be. “Where it [infill housing] hasn't worked as well is in cities where the homeownership ethic and owning a little plot of land is such an ingrained mantra, such as in Indianapolis or Louisville. And it hasn't worked in cities that go dark at night.”
Prognosis after Sept. 11
The biggest question after the tragic events of Sept. 11 is how much the fear of future terrorist strikes will affect the intown development boom. In the wake of the attacks on New York and Washington, D.C., concerns rose about living in densely populated areas and in high-rise buildings.
In short, the jury is still out on the future of high-rise apartment living. “The fear factor is going to be a function of the intensity and the frequency of future terrorist acts versus people's determination to stay and enjoy their lifestyle. It will have a small effect, but not a major effect on people's desire to live in urban areas,” Burns predicted.
Financing still available
Despite the slumping economy, GDP decline and mounting job losses, the availability of financing for multifamily properties has remained solid. “In the multifamily area, it hasn't skipped a beat,” Burns said. “In other property types, lenders are getting much more conservative on their loan-to-value ratios, but multifamily is the preferred property type.”
And there appears to be little differentiation in the capital markets between urban and suburban projects. “Multifamily is multifamily. If it makes sense and there is perceived demand, then it gets the same treatment,” Burns said. “There is stable cash flow, and there's been a historical track record that's been pretty extraordinary since the early 1990s.” Indeed, the National Council of Real Estate Investment Fiduciaries (NCREIF) and the Rosen Consulting Group report that apartments have posted average returns of about 12% since 1994.
In a dramatic show of faith in the sector, Lend Lease expects to increase its investment in multifamily properties by 20% between July 2001 and July 2002. In fiscal 2001 (July 1, 2000 through June 30, 2001), Lend Lease invested $650 million in apartments.
Are apartments insulated?
Emerging Trends in Real Estate 2002, a report recently published by Lend Lease and PricewaterhouseCoopers of New York, concludes that of the five major property types, the apartment sector remains the most insulated from the fluctuations of the economy.
The lending institutions have discouraged overbuilding, Burns believes. “It hasn't had the volatility that we had in past cycles — known as the slingshot effect — when [development] goes way beyond where it needs to go. There have been checks and balances that haven't been there in prior cycles,” Burns said.
But can urban properties, in particular, be hot in the short- and long-term? Ross Smotrich, managing director of New York-based Bear, Stearns & Co. Inc., was surprised to find that the answer may actually be “no.”
“I think it's fair to say that the economy has deteriorated in the last two quarters, that the apartment markets generally around the country responded more quickly and got hurt more deeply than we had anticipated,” Smotrich said. “Generally, I thought apartments would be a little more counter-cyclical and a little more defensive than they turned out to be.”
Smotrich noted that rapid job losses over the past few months have translated into a quick fall off in demand for apartments, so markets with a high percentage of new development, such as Atlanta, felt the negative effects quickly. According to the Atlanta Apartment Report published by Dallas-based M/PF Research, employment growth from second- to third-quarter 2001 for the metro Atlanta area registered a miniscule 4,700 new jobs. Meanwhile, apartment occupancies also dropped 3.3% to 94% during the same time period.
The same was true in other markets such as San Francisco and Denver, where formerly rapid job growth came to a halt. But, Smotrich added, apartment markets will bounce back quickly when the overall economy rebounds.
Urban vs. suburban
Although the urban living trend will continue, most observers expect suburbs to hold their own, especially if urban rents continue to climb and price more renters out of the market.
“In the short term, the intown markets are likely to fare about the same as the suburbs,” Witten said. “Demand [for intown apartments] will be weakened by those residents who opt to save money on monthly rent and live elsewhere because intown rents are clearly higher.”
There may be no fighting the demographic tide of the Echo Boom, however. “Certainly, demand will remain strong for urban living,” said Geiger of CB Richard Ellis. “As the U.S. population continues to age, more empty nesters find they do not need a large single-family home now that their kids are gone. You have others who want to be close to the ballpark, or close to the arts district or great restaurants. All these things will be downtown or midtown, typically.”
But don't count out the suburbs and the amenities that made them popular in the first place. “People are working from home more and do not necessarily have to commute to the office every day. These are also the same people who like cutting their lawn and being part of a neighborhood,” Geiger said.
Obrinsky agreed. The relative growth of suburbs compared with cities is unlikely to change in the near future, because as population continues to grow — at an annual pace of about 2.5 million people in the U.S. — there is far more available space in the suburbs, he said.
Even so, the attractions of city centers will remain a draw for many people, Obrinsky said.
“The increasing population in suburbs — and the expansion of the suburbs over a wider and wider area — is likely to greatly worsen existing traffic problems, resulting in even longer commuting times for those who live at considerable distances from their downtown workplaces,” he added.
“A chance to shorten commuting times may become an even larger lure.”
Ben Johnson is an Atlanta-based writer.