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Central Florida builder Frank Herring Jr. of Faison Enterprises expects a big boom in rental residential infill development in his market over the next three to five years, and he has demographics and logic to back up that notion. But as builders shop for rental sites, they should take a close look at the "Multifamily Forecast Report" that NAHB's economics department recently released and do a quick count of recently built or converted condo apartments that may be oozing back into their own town's rental supply as investors bail and head back to Wall Street.
Herring suspects interest rates will climb right along with house prices and commuting costs. This would push the price of a new home out of reach of the echo boomers' taking jobs in Central Florida's resort-driven economy. He believes that Orlando's future is high-density and urban.
Consultant and GIANTS columnist John Burns agrees. In his latest newsletter, Burns writes, "With home prices now beyond the reach of many middle-income households, this will be the year the apartment market surges." He cites data from RealFacts, an apartment market research firm, showing 222 rental apartment communities in 15 states that were converted to condo ownership in 2005 — triggering a shortage of rental units.
However, just because an apartment is converted to a condo doesn't necessarily mean it's no longer in the rental market. "I got a newsletter that said 120,000 apartments were converted to condo last year, bringing the net change in the supply of rental apartments to zero," says rental builder Steve Patterson, president of Orlando-based ZOM Development, a specialist in luxury apartments aimed at renters-by-choice. "It said now is the time to find land and build rental projects — all you can, wherever you can. But that doesn't make sense to me. It doesn't account for all the condos bought by investors that are now leaking back into the rental pool."
NAHB's report points out that from 1997 to 2005, starts of for-sale multifamily units increased from 59,000 to 149,000 a year, with most of the increase in 2004 and 2005. Meanwhile, market-rate rental production fell from 235,000 to 120,000 per year.
"The most notable and possibly troublesome development over the past two years has been the explosion of production of condo units," NAHB's economists write.
"After remaining at about 20 percent (of total multifamily production) for a number of years, the for-sale share of multifamily starts jumped to 25 percent in 2003, 35 percent in 2004 and 43 percent in 2005. ...The 149,000 for-sale multifamily units started in 2005 greatly exceeded the 98,000 completed (last year). Thus, much of the condo production tsunami hasn't yet come on the market as completed supply."
The report also notes conversions of existing rental properties to condos may have reached 195,000 units in 2005; 16,000 hotel rooms and office buildings with 20 million square feet also moved into the hands of condo converters.
None of this necessarily overrides the recent increases in rents in many markets that now make rental investments more appealing. But the power is not at a price point that's easily reached.
Patterson says his firm will continue to build projects for high-income renters-by-choice. "I think 2007 is when you'll really see a big spike in rental starts because land prices are coming down."
The total number of multifamily housing starts has remained fairly stable this decade, Burns says. "It's the mix between rental and for-sale that's changed, but a lot of people who own condos are not living there.
"The multifamily market is really messed up. I think a lot of condo projects aren't going to get built. And many of the conversions are B quality or less, so much of that will drift back into the rental market.
"The other piece of the puzzle is single-family home rentals, which are way up because investors own them."
The best idea may be to watch what happens in the condo market before committing on land for rental housing.
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