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Supply Shortage of Multi-family Housing

"You never want a serious crisis to go to waste"                                                                                                                                            Rahm Imanuel                                

During the housing boom apartment operations struggled but they are now into a strong comeback. It all comes down to supply and demand.

The housing bubble went into high gear back in 2003 as interest rates were lowered and lending criteria loosened. This allowed the top tier of renters to purchase homes. As the bubble continued to grow more and more renters left the apartment market for home ownership. Landlords were forced to lower rents and to lower rental screening criteria to fill their buildings. A side effect of lowering rental criteria is usually that tenants with lower credit ratings are more likely to cause significant damage to the property and are less likely to pay rent on time or to complete the lease.

In 2008 as the housing bubble burst we began to see apartment rents stabilize and vacancies start to go down. This was simply due to the fact that home ownership was in decline which means more people were renting. The financial crisis that followed has caused some challenges to apartment operations but for the most part apartments are doing well in spite of, and partly due to the economic downturn.

The population in Portland continues to grow even as we have high unemployment. More people are moving to Portland each year than are moving away.  This is partly due to the fact that Portland has one of the lowest costs of living among large cities along the west coast. Portland’s economy is struggling but so are the economies of nearly every other state in the union.

Supply and demand are always in search of equilibrium, but it can take years for one to overtake the other. We see the shortage of apartments lasting for as much as 3 – 4 years. Currently vacancies in Portland are averaging close to 3% which is well below the norm of 5%. When Vacancies get this low, historically we see rents go up, which is currently happening and sales prices are beginning to go up as well. The higher rents climb relative to costs of construction, the more it makes sense financially for investors to start building new apartments. The reason that it takes so long for supply to catch up with demand is that it takes time for rent levels to climb high enough to spur new construction and then a year and a half beyond that to get financing, permits, and to complete construction. Currently there are very few projects planned and are not likely to be many until rents have climbed by at least 15% or more. Only when rents are that high will it make economic sense to start to build new supply. If rents increase rapidly, it won’t take more than a year or 2 for new construction to get into planning. If rents raise more slowly it could take a few years longer. Either way, it will happen because demand is strong and growing stronger while supply is stagnant.  

The imbalance in supply and demand is what creates an opportunity for investors to purchase existing properties at today’s deflated prices and ride the wave of growing rents over the next few years. As an example, an increase of the rents by 10% can increase the value of the building by 20% and with a normal mortgage the equity would increase by 60%. A recent article on CNN Money estimates that many cities will see increased rents for apartments by 7% - 10% each year for the next few years. 

Additionally as mortgage interest rates raise to combat inflation it will make it more expensive to build new apartments, forcing rents even higher. One of the best hedges against inflation is apartments. They provide shelter, a basic human need which does not go away with changes in the economy. During tough economic times affordable housing is greater demand than ever.

 You can still buy local apartments for less than the cost to build. That opportunity will pass before new construction starts. There are several unique opportunities that Westland is currently pursuing and are not yet fully funded. Contact Erik Mattson or Jerry Mason with questions or for more information on upcoming opportunities.

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