Builders See Steady, If Uncertain, Multifamily Market

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Builders See Steady, if Uncertain, Multifamily Market
MBA (1/18/2006) Sorohan, Mike

ORLANDO-A leaner apartment/condo market for the next several years? Don't tell that to Jerry Starkey.

"We think we're on the leading edge of a social phenomenon," said Starkey, president and CEO of WCI Communities, Bonita Springs, Fla., speaking at the National Association of Home Builders' International Builders Show here. "I think over the next few years you'll see a significant mix of single-family and multifamily, and it could reach a 50-50 mix when it's all said and done."

While Starkey's assessment might appear over-optimistic, he bases his opinions on certain realities. Over the past several years, he said, condos have been the big story in multifamily housing, representing half of new multifamily units built. WCI has been immersed in that trend-since 1993, the company has built 33 high-rises comprising 17 million square feet, mostly in Florida.

Now, WCI is focusing its efforts up and down the Atlantic coast. The emerging market, Starkey said, is the Baby Boomer generation, 78 million strong, of which two million are turning 50 every year and 8,000 are turning 60 every day.

"We're seeing a higher demand for condos, particularly high-rise condos," Starkey said. "The Baby Boomers are amassing wealth and approaching retirement. And they are benefiting from a huge amount of intergenerational wealth over the next two decades. And they're out buying homes more than ever before, which is why demand is so high."

Another driver of housing demand, particularly high-rise housing, is the suburban commute. "It's not uncommon for people to spend one-two hours commuting, which really takes away from the quality of life," Starkey said. "They are looking for quality of life, which is not defined as time outside, but as time at home. So people are moving back from the suburbs to cities; and you have young professionals who are opting to never move to the suburbs.

Additionally, suburbs are driving the move back urban because of government regulations. "This is impeding the ability for growth in the suburbs, and placing stress on infrastructure," Starkey said. "This is driving a new look at high-density urban areas, which in turn is driving the cost of land and real estate in cities through the roof. High demand and high cost forces housing to go vertical-so instead of the two-story, three-story apartment complex, you're seeing 10-12 story buildings."

Cities are better-equipped to handle infrastructure demands than suburban areas, said Bob Koch, principal and director of Fugleberg Koch Architects, Winter Park, Fla. "Many urban areas are encouraging density-that's because their infrastructural costs can cover greater populations, at a lower unit cost," he said.

Tom Bozzuto, CEO of The Bozzuto Group, Greenbelt, Md., countered that construction costs have risen, which makes pricing on condos less attractive. "Unit sales of condos are definitely slowing," he said.

And Steve Patterson, CEO of ZOM USA, Orlando, predicted that as many as 20 percent of all South Florida condos could be on the market in the coming year, creating a glut and possibly sparking activity in "vulture funds" which he said have been stockpiling cash to purchase unsuccessful condo communities.

Eric Bluestone, president of Bluestone Corp., Fresh Meadows, N.Y., echoed the pessimistic note, observing that rental units, which traditionally serve those who choose not to buy or who cannot afford to buy, are in shorter supply. In particular, he said, this is hurting the moderate-income renter who does not qualify for subsidies or who are not affluent to be in the luxury market.

"Ten years ago we were competing for space at $25 per developable square foot. Now we're competing for space at up to $200 per square foot," Bluestone said. "The good news is, the vacancy rates are dropping, so there's not a lot of product out there. The bad news is, competition is becoming increasingly fierce. In 2006, competition for space will continue, so the number of multifamily rentals will probably continue to drop. Unfortunately, moderate-level workforce housing is going to suffer."

To counter that trend, Bluestone is investigating rental areas outside of core areas, where the condo market is not as attractive. "There, the land is not as expensive and we can make the numbers work for rental housing," he said.

Additionally, Bluestone and other rental unit developers have been appealing to politicians. "We've been working strongly in the New York area to lobby city and statewide to bridge the gap to address the middle income housing market, either through subsidies or through modernizing the laws," he said.

Meanwhile, Starkey is reacting to the changing demands of the market by building larger condos. "Fifteen years ago the average size of a condo was 1,500 square feet; now, it's not unusual for us to build units that have 2,000, even 3,000 square feet," he said.

An exception is New York City, which has the highest condo prices in the world. "In New York, a 900-square-foot condo goes for $1 million," Starkey said.

The only thing holding back the market is competition. "The inventory of existing condos will be larger in 2006, and, while there are an increasing number of buyers attracted to the condo lifestyle, some will be constrained by high prices and rising interest rates," he said.

One thing that will not change, Koch said, is the demand for quality. "Even in the tightest, most expensive markets, well-designed communities with attractive features fill up first," he said.