The driving forces behind expected growth in multifamily construction allow dealers to meet demand on several levels

Multiple opportunities: the driving forces behind expected growth in multifamily construction allow dealers to meet demand on several levels

Rich Binsacca

It’s easy to feel a little wishy-washy about supplying multifamily housing. While nearly every industry economist expects that segment of the housing market to grow along with the single-family sector for the next decade, many dealers still may be wary because the trend for multis appears to be headed toward high-density urban infill projects, where buildings over four stories generally require materials that even large-scale LBM dealers do not commonly stock.

But soaring steel-framed high-rises are just a snapshot of the industry, and a fuzzy one at that. Dealers who sharpen their focus on the multifamily market can find sales and support opportunities even in mid- and high-rise projects in their city’s downtown core, as well as within the steady (if less dynamic) growth of wood-framed low- and mid-rise apartments in the suburbs.

In addition, there’s increasing investment in condo conversions and general housing improvements in both rental apartments and for-sale multifamily homes. “The demand for multifamily will be greater than ever in history,” predicts Tom Bozzuto, president of The Bozzuto Group, a multifamily developer in Greenbelt, Md., that serves several areas of the Washington, D.C., metro market with both rental and for-sale projects.

Driving Factors

Bozzuto’s enthusiasm, echoed by his peers and housing industry analysts, comes from an understanding of the demographic, geographic, and economic indicators that are converging to drive the multifamily market to numbers not seen since the mid-’80s. According to “America’s Housing Forecast,” a 2003 report issued by the Homeownership Alliance, a consortium of economists, multifamily housing will produce an estimated average of 400,000 annual starts through 2013, representing 20 percent of the nation’s annual total. That’s a 25 percent boost from a nearly 300,000-unit annual average during the past 10 years.

Specific to demographic trends, multi-family developers and builders foresee an impact from both retiring Baby Boomers and their kids, labeled Echo Boomers, which each represent 27.5 percent of the nation’s population, or about 80 million people. The number of renters in their mid-30s is shrinking as the predominant multifamily dweller demographic. “There’s always been diversity [among multifamily renters and buyers], but it will be even more so in the future,” says Bob Paley, senior development director for AvalonBay Communities’ New York City office, one of several branches of the Alexandria, Va.-based developer.

Paley and other multifamily developers also rely on “renters by choice,” a diverse group of folks who could buy homes, but prefer to rent. “These are people in transition,” says Paley, including empty-nesters, relocated professionals, and graduate students all more attracted to one-year leases than 30-year mortgages. “Renting makes more sense for their lifestyles.”

Despite a solid base of renters by choice, new multifamily rental development is lagging behind for-sale condos and single-family homes as fringe renters take advantage of low mortgage interest rates to get into the buyer’s market. “It’s no secret that the apartment industry has been hit hard and drained of renters,” says Bozzuto.

To combat the trend, Bozzuto is focusing his new rental projects in previously passed-over infill sites near established employment centers and relying on wood-frame construction instead of steel and concrete to keep costs and rents reasonable in order to keep units leased. “The lower land price [for an infill site] and the significant cost savings of using wood allows us to offer rents that the market will support,” he says, signaling an opportunity for LBM dealers to get on the multifamily bandwagon.

Meanwhile, geographic trends toward increased urban and close-in suburban development also are expected to support the uptick in multifamily production. “Most urban jurisdictions recognize that they need housing to keep their neighborhood vital,” says Bozzuto.

Small-lot infill rental and for-sale projects, whether for amenity-seeking retirees or club-hopping college grads, breed higher-density housing–in other words, buildings that climb five or more (often much more) stories into the sky.

Though still only about one-fifth of the total market, the percentage of multifamily projects with four or more floors has tripled at the expense of low-rise buildings during the last decade. “With increasing limitations in land supply, there’s a greater push to reclaim underutilized, close-in sites and build high-density housing,” says Bozzuto.

Simply, location dictates not only a multifamily project’s density (expressed as “dwelling units per acre,” or DUAC), but also its construction method and materials–providing a road map for dealers interested in pitching their inventory and services to multifamily developers and framing contractors.

For McNaulty Lofts, an 85-unit condominium project near downtown St. Petersburg, Fla., for instance, local developer Echelon Communities (which also builds rental and for-sale multifamily in Orlando, Fla., Memphis, Tenn., and Dallas) specified long-span, staggered steel trusses and hollow-core planks filled with 2-inch concrete pads for the 13.5-story building, complete with a precast brick exterior. The company relied on its steel erector to supply both the labor and materials for the job.

But for Echelon at Bay Isle Key, a garden-style project located on 20 acres a bit farther out of St. Petersburg’s urban core but near its Gateway Business District, the developer chose a wood-framed system. “The choice of material depends on the project type,” says Tim Tinsley, president and CEO of Echelon Communities. The company just completed 213 units in phase two of the project, relying on its general contractor to negotiate the lumber and related framing materials purchase.

Economics are the third factor driving multifamily development. While low mortgage rates and a slow job market recovery have stymied new rental projects overall, causing a net loss of 800,000 units since 1992, markets showing strong economic growth, including those in Florida, Southern California, Arizona, and Nevada, are on the rental rebound. Not coincidentally, many of those locations have ties to the defense industries which has aided their recovery with job and income growth in recent years.

As the national economy improves, so does the outlook for rentals. A more diverse age distribution combined with minority and foreign-born residents is expected to help revitalize multifamily rentals, while other economic incentives–including a greater ability among federal housing agencies to finance and insure affordable multifamily projects, especially in high-cost markets–are in place or being pushed in the industry to reverse the tide.

Opportunities for Dealers

Rather than a stumbling block, the complexity of the multifamily market offers LBM dealers a chance to participate in segments of its future.

As a greater number of renters decide to get into the for-sale market, apartment owners are apt to make improvements to facilities to recruit or retain renters or convert their projects to condominiums. “There’s a huge trend in conversions,” says Tinsley, especially because existing multifamily projects offer attractive and established locations, as well as a faster move-in schedule compared to a new nigh-rise for which buyers might wait two years before occupancy. “Conversions are readily available and cheaper [than new projects].”

Meanwhile, rental property owners increased spending on apartment improvements and repairs by 7.5 percent in 2003 to nearly $57 million, according Harvard University’s Joint Center for Housing Studies (see “Multifamily Resources,” page 90), after a 6 percent boost in 2002.

For both conversions and improvements, multifamily property owners seek a variety of building materials, such as upgraded windows and doors, kitchen and bath components, and low-maintenance siding and roofing.

That’s a materials list most full-service IBM dealers can fill for the general contractors and various interior trades hired by property owners to upgrade their rental properties or convert them to desirable condos–often the same pros managing and building new multifamily and perhaps light commercial and single-family projects for other developers.

Of course, the opportunity to help multifamily developers optimize the labor and materials efficiencies of wood construction is huge. “In some cases, using lumber is a combination of cost efficiencies and culture,” says Bozzuto. “There aren’t a lot of carpenters who’ll take responsibility for the amount of materials we need for a 250-unit job, so we’ve been building relationships and buying direct from lumberyards for 20 years.”

While the chance to supply a large-scale project with railcars of lumber and other wood-based building materials may appear attractive, developers warn that they are more demanding than their single-family counterparts are. “These guys have big buying power,” says Paley of AvalonBay’s construction operations, which takes his handoff after a project is approved to start.

Among a dealer’s other contractor customers, Paley says, “they want preferred customer status,” to avoid being delayed by materials shortages, most recently in concrete, OSB, and drywall. “They’re seeing the price increase like everyone else [for those materials], but they want them available when they need them.”

Dealers can help themselves by paying attention to the demographic, geographic, and economic indicators of multifamily growth in their markets, as well as code changes, such as sections of the International Building Code (ICC or I-codes) that enable wood-frame construction for buildings more than four stories above grade, which hot multifamily markets such as New York City recently adopted. “We build a broad range of products to capture the variety of needs and demands of the market,” says Paley. “There are opportunities for everyone to participate.”

Multifamily Resources

Even though it’s part of the overall housing market, the multifamily segment has a culture and language of its own. Consider the following resources to get up to speed about this slice of the residential realm: * “Multifamily Market Outlook” is a monthly electronic newsletter produced by NAHB’s Multifamily Council, available free to members and $150 a year for non-members at www.nahb.org. * “The State of the Nation’s Housing 2004,” published by the Joint Center for Housing Studies of Harvard University, including a separate section on rental housing, available as a tree POF download at www.jchs. harvard.edu, or call 617.495.7908. For more about the rental market, download “Middle Market Rentals: Hiding in Plain Sight, 2004,” at the same location. * NAHB’s Multifamily Council also produced a video to help developers dispel the myths associated with multifamily housing and illustrate their positive economic impact to combat opposition to apartment building. Call 202.266.8350 to obtain a copy for $20. * MULTIFAMILY EXECUTIVE magazine, a sister publication of PROSALES, offers information and articles on its Web site, www.multifamilyexecutive.com, as well as an e-mail newsletter.

Rich Binsacca is a contributing editor to PROSALES.

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