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PROE S S E N T I A L K N O W L E D G E F O R M U L T I H O U S I N G

Multifamily:still king of thereal estate jungle

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This year has been dubbed the year of therental, the year of the condo and, by thewary, the year of looming apartment glut.

By the number of cranes active in thenation’s urban markets, the moniker thatbest describes multifamily in 2014 might bethe year of the luxury high-rise.

Major metros are buzzing with activity asdevelopers reach for the sky with housing

aimed at young professionals who aremigrating to urban centers—a trendHumphreys and Partners Architects callsthe “Manhattanization” of the U.S.

According to Axiometrics, 74 apartmenthigh-rises are slated for delivery this year,with another 81 scheduled in 2015.

When the only buildable infill land issometimes as small as a half acre, the onlyway for developers like Orlando-based ZOMto build is up.

Other groups answering demand for mul-tifamily high-rise include Atlanta-basedNovare Group, with its Sky House-branded

apartment towers rising in Tampa, Austin,Dallas, Houston, Atlanta, Raleigh andCharlotte, and The Related Group, whichbuilds rental and for-sale product, whenevera market favors one or the other.

This taller product is more costly to build.The good news is that, while prices for infillparcels have increased, materials’ cost hasremained flat, constrained by the tepidoverall economy, compared with the previ-ous boom cycle, when costs for concrete andmetal were driven sky high by worldwidedemand from emerging markets like Indiaand China.

New construction methods also help defraycosts, including the modular constructionemployed by Forest City Ratner at AtlanticYards, where units that are pre-assembled in

High-risers

WENDY BROFFMAN

Warren at York The fast lease-up of the Warren inJersey City is credited to the project’s locationalong the Hudson River waterfront, proximity tomass transit and a walkable neighborhood, a five-star amenity package and spectacular floor-to-ceiling views.

Met 3 ZOM in March purchased the air rights andparking spaces above the mixed-use Met 3 indowntown Miami to build 462 luxury apartmentsabove the parking garage. Amenities will include apool above the garage, a yoga lawn, two outdoorbars, a screening room, a gym and spa with treat-ment rooms and a demonstration kitchen.

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the factory are delivered to the site andHumphreys and Partners’ two-corridor designthat is said to increase floor-plate efficiencyand cut down the length of corridors.

Rentals reach new heightsWith rental projects in various stages inFlorida, Houston and Washington, D.C.,ZOM closed in April on a site for approxi-mately $16.8 million and expects to breakground in Q4 on a 46-story, 420-unit towerin Miami’s Brickell neighborhood. Thecompany already is underway in downtownMiami on the 32-story, 462-unit Monarc atMet 3, where units will range from 680 sq.ft. to 1,450 sq. ft. Met 3 sits above a groundlevel Whole Foods and a 12-level parkinggarage. The apartments will begin pre-leas-ing in Q4 2015 and deliver in 2016.

Meanwhile, ZOM is building the 187-unit Beacon at Clarendon West, located a

half block from the Clarendon metro stop inWashington D.C.’s Rosslyn/Ballston corri-dor, and 19Nineteen, a 191-unit mid-rise inArlington, Va., that includes 17,500 sq. ft.of retail space on the ground floor. Both arescheduled to deliver this year.

The developer is active in Houston, aswell, with its third apartment project thereand eighth in Texas—a 431-unit mid-risecalled The Hudson in the Galleria/Uptownmarket that will begin leasing in Q3 2015.

ZOM’s apartments are managed by itsaffiliate, ZRS, which also does third-partymanagement for other institutions, andoperates a portfolio in excess of 24,000 units.

Experience mattersIn South Florida alone, there are 12,000rental units under construction, 4,000 by TheRelated Group, 75 percent of which are high-rise in Miami–Dade and Broward Counties.

Because high-rise is a difficult process forthose who don’t have a depth of experiencewith the product, it’s likely some of the proj-ects in the planning and permitting stageswon’t actually be built.

For instance, ZOM was not the firstdeveloper of its two Miami high-rises and

came to both situations after the initialdevelopers failed to perform.

“We were chosen to be the second devel-oper because we have done this before andknow how to execute well in this type ofproduct,” said ZOM Chief DevelopmentOfficer Greg West.

ZOM has developed more than 13,200apartment units nationwide throughout its30-year history and established a number ofvaluable capital relationships.

During the condo boom, a large numberof apartment units in South Florida wereconverted to for-sale. This latest flurry ofhigh-rise apartment development comesafter the long lull caused by the recessionand the bulk of newer existing rental supplyin the market consists of investor-ownedcondos and single-family homes.

“There is a vast supply of housing outthere in condo buildings with renters inthem, yet there are few professionally man-aged options for people to choose from inMiami and none that meet the developmentstandards of modern rental housing. To ourview, we will have the first and only two pur-pose-built, professionally managed luxurybuilds in downtown Miami built to modern

ZOM’s The Hudson in Houston is a four- andfive-story wrap construction located on a 5.3-acreparcel close to a retail center and anchored by aHEB market. The buildings are constructed aroundthree centrally located landscaped courtyards.

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standards and I think that puts us at a signif-icant competitive advantage over the shad-ow rentals and all of the difficulties that arenter has to deal with renting a unit in abuilding like that,” said West.

Washington, D. C., with 27,300 apart-ment units currently under construction, itis the market most at risk for overbuilding.

West believes ZOM’s projects there aresomewhat immune to the softness affectingmultifamily in D.C. because of the strengthof the highly desirable, high-barrier R/Bcorridor. “Our Clarendon location is retailrich because of all the bars and restaurantsand is a popular place to live for young pro-fessionals,” he said.

It’s what’s outside that countsThis generation of luxury apartments is tar-geting renters who can afford to pay morethan $2 per sq. ft. The secret to catering tothis demographic is creating a lifestyle expe-rience with the amenities of a five-star resort.

“When we decide to build a high-rise, itis because it is on a site with an extremelyattractive location, and the reason I say thatis because the first reason people are decid-ing to live there is less about what’s inside

their unit and more about what’s in theirarea. And, even in the building itself, it’smore about what’s outside their unit thaninside,” said West.

ZOM provides lounges arranged morelike hotel lobbies than traditional club-rooms, where renters can meet and socialize.

“Having those kinds of areas, bothindoors and outside—pool decks, outdoorfireplaces, lounges, bars, game areas—are allthings that are critically important to theluxury renter.

“They want a nicely appointed unit, rela-tively small, and a great community space inthe building and the ability to walk out thedoor to a lot of fun things,” said West.

Luxury amenities paid off for BNE RealEstate Group, which pulled out all the stopsat its 139-unit, 11-story Warren at York inJersey City’s historic Paulus Hook neighbor-hood. The property was already 90 percentleased when renters began moving in onMay 1 with rents ranging from the $3,000sfor 607 sq. ft. studios to the upper $5,000sfor 1,789 sq. ft. penthouse units. pre-leasingbegan in April.

Another year of the rentalMost housing experts agree that 2014 will beanother great year for the apartment industry.

Development slowed substantially duringthe recession, but prior to that, the housingboom shut out the rental market. The con-fluence of these two things created enormouspent-up demand and plenty of room for gooddevelopment for years to come, said West.

“Because there was no supply for so long,as the economy started to improve, the rentgrowth was astronomical, unprecedented inmy career. Will it continue? Absolutely not!It’s going to moderate substantially, I’m sure,and it will be flat in some places, but not thesix, seven, eight, nine and ten percentincreases, which is what it’s been,” said West.

A new renter outlookOne reason apartment demand remainsstrong is because Americans no longer viewhomeownership in the same way.

“Renters leave because they are going tobuy and that’s always been the case in ourbusiness and will continue, but there is apermanent shift in people’s bias for renting,because they no longer see investment in ahome as a risk free venture.

“To be able to avoid the risk and have theconvenience of a professional manager tak-ing care of the property and, in our case, tohave urban amenities nearby, creates a gooddemand for urban living in rental housing,”said West.

Another reason people are choosing to

rent, says Jack McCabe, founder and CEOof McCabe Research and Consulting LLC,has to do with jobs and where people arefinding them.

“People are moving for jobs because it’sdifficult to get one that pays well. The pit-fall in Florida during the downturn was wedidn’t have a lot of jobs created. There werejobs in Texas, however, but homeowners inFlorida couldn’t move to Texas because theycouldn’t sell their homes. So, to young peo-ple who learned from the recession, mobili-ty is one reason they don’t see homeowner-ship as the greatest thing. They know theymay have to move to get a good paying job,”points out McCabe.

Condos back in a big wayThe flipside of the high-rise rental story isthat a resurgence of condo development isunderway from coast to coast. Still 30 per-cent short of the previous peak, condos’share of total existing home sales isapproaching pre-recession levels, reportsCoStar Group.

New York City is leading the way withsome of the tallest buildings, while the WestSide waterfront along the Hudson River isbeing called the new condo coast.

In Chicago, construction is underway inthe South Loop on the city’s first condo towersince the housing bust—the 15-story, 144 unit1345 Wabash by developer CMK Companies.

And, in Boston, The Related Group andpartner The Beal Company, revamped theirpreviously approved 14-story apartmenttower in the West End Bulfinch submar-ket—switching from rental to for-sale.

But nowhere is condo activity frothierthan in South Florida, where condo wasonce king.

Those projects are funded by the buyers,not the banks, with a very heavy depositstructure designed to help developers avoidoverleveraging, said West. As much as 80percent of the purchase price of the unit isbuyer-funded through deposits through the

When we decide tobuild a high-rise...it’s more aboutwhat’s outside theirunit than inside

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course of construction.At least 186 condo towers with 25,125

units are proposed in South Florida—somealready in development with sales pricesthat top the previous boom. Around 50 witha total of 14,000 units are proposed or underconstruction along a 60-mile stretch ofMiami’s Brickell Ave., representing morethan 65 percent of the construction pipelinefor South Florida’s entire tri-county area.

The Related Group has proposed morethan half of those—29 projects with a totalof 7,500 units—and in January brokeground on the SLS Hotel and ResidencesBrickell, a condo project that stalled duringthe last housing bust. Like all condos beingbuilt in South Florida today, they are aimedat ultra-wealthy international buyers.

McCabe warns, “Buyer beware!” Hebelieves hedge funds are artificially pumpingup prices in many markets. “In South Florida,we’ve seen increases of 20 to 37 percent inreal estate values in the last year. There’s nolegal investment I know of that has returnedthose kinds of appreciation,” he said.

He explained that hedge funds swoopedinto South Florida after the 2007 housingbust and bought tens of thousands of condosin bulk. Entire projects were bought at bar-gain prices – discounts of 50 to 75 percentoff 2006 top-of-market prices.

“Then, around 2011, the hedge funds andother corporate buyers changed strategiesand bought foreclosed-on single-familyhomes at huge discounts. In 2013, theyshifted again, now paying full price andabove, artificially inflating prices and val-ues. High net worth individuals from SouthAmerica followed suit,” he said.

McCabe believes the majority of SouthAmericans and Asians who would or couldbuy new condos in South Florida have alreadybought most of the existing inventory and putdeposits on the newly announced projects inthe Brickell area and Eastern Dade.

“So new projects and those yet to beannounced face increased competition for adwindling supply of buyers,” he said, notingthat the hedge funds have now moved on togreener pastures in secondary markets.

McCabe, who forecast the previous hous-ing bust, is seeing signs of a bubble in thefor-sale housing market. “It’s a hot topicright now and analysts are split. I personallythink there is danger of a bubble, notnationally, but in those states where we sawthe greatest rise in artificial appreciationand the rocket came crashing back to earthwith 50 to 60 percent drops in prices.California is getting into bubble territoryand Florida and, three or four years fromnow, Las Vegas and Phoenix,” he predicts.

(above) The Beacon at Clarendon West inWashington, D.C., consists of a six-story and 10-story tower with two levels of underground park-ing and a dedicated street over the garage thatseparates the two buildings.

(below) ZOM’s Brickell Ave. high-rise is directlyacross from Brickell City Center, encompassing ahotel and condos, office space and a multi-levelopen-air shopping center covered with a unique“climate ribbon” that keeps out rain and influ-ences temperature.

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