Units Aren’t Keeping Up With Household Creation

While the multifamily market might not be quite as sizzling as in the past few years, Farrell believes it remains solid and future prospects are not as gloomy as others have hinted, GlobeSt.com learns in this EXCLUSIVE.

HOUSTON—The apartment market might be murky to some, but LMC president Todd Farrellhas an optimistic perspective on the state of demand in 2017 and beyond. Farrell, whose emerging company recently won the PERE Award for capital raise of the year, understands that multifamily might not be quite as sizzling as in the past few years. However, he believes the market remains solid and prospects for the future are not as gloomy as others have hinted. Farrell discusses these multifamily trends and other concepts in this exclusive.

GlobeSt.com: Generally speaking, we’ve seen a softening of the apartment market, with rent growth slowing and vacancy rates rising slightly in many markets. How are you approaching new development moving forward?

Farrell: The nation is definitely going through a natural process of absorbing some of the supply that was started in 2014 to 2016, and several submarkets have gotten really competitive for residents. However, the underlying fundamentals continue to point to a compelling argument that the nation overcorrected during and after the Great Recession, and we are pretty optimistic that this wave of supply will get absorbed more quickly than one might think.

GlobeSt.com: Which regions of the country are currently experiencing the most softening, and which ones are holding steady and even improving?

Farrell: This business has always been a submarket business and not a regional business. When you have five to 10 new communities competing for the same resident, you will have softness until those properties stabilize. West Houston and North Dallas are very competitive, for now. On the other hand, we have continued to carefully watch Denver, Charlotte and Seattle for real weakness, but they all continue to perform well.

GlobeSt.com: It has been reported with a batch of new apartment homes coming on line, many big banks are no longer interested in providing loans for new development. Has LMC found that to be the case, and how is your company raising capital for new development in this environment?

Farrell: The banks are reacting more to their own exposure to the sector than to any economic weakness, in our view. We know of no apartment loans that are in trouble, but the banks are definitely slowing down. We recently raised a large capital venture that utilizes low leverage, which has been a distinct advantage for us in procuring construction loans. We will continue to raise this type of low-leverage, patient capital as we continue to grow our portfolio.

GlobeSt.com: Looking ahead to the rest of 2017 and even beyond, what do you see in terms of the health and performance of the apartment sector?

Farrell: We feel like, while there will be pockets of softness when several new lease-ups battle it out, the overwhelming evidence is that the nation is simply creating more households than it is building housing units. And the demographics of much of that growth are favoring rental over ownership, so we are pretty bullish on the sector.

For perspective, the US started 1.2 million new housing units in 2016, which is the same production level as we had in 1992. However, the US population today is 321 million versus 256 million in 1992. With many preferring to rent, the demand will be there.

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