Strong housing demand sparks flurry and variety of multi-family projects
Although the pandemic and recession have depressed demand for office, retail and hospitality construction, investors are seeing opportunities and increasingly moving forward with projects in another sector – multi-family.
“We are seeing very strong activity in multi-family, including affordable and market rate projects,” said Ken Kolb, Director of Acquisitions and Senior Associate at Plano-Coudon Construction. “We are seeing established developers who have been in the market for years, still aggressively pursuing properties for new developments. We are also seeing a lot of new investors and developers who are pivoting into the multi-family market.”
That market activity is generating periodic calls from investors and developers, seeking pro forma analyses of proposed projects on specific sites to determine if the project costs, financing and rental/purchase prices can pencil out. In the last six months, Plano-Coudon has provided pricing on 15 different multi-family projects, Kolb said. The company currently has six multi-family projects in some phase of planning or construction.
Design Collective has seen “steadily increasing activity in both requests for proposals and project starts since November. In 2021, we expect to see more awards for full-service design and documentation on ‘let’s go into construction as soon as we can’ kinds of projects,” said Michael Goodwin, Managing Principal and COO at Design Collective. “There is a good amount of pent-up demand for multi-family so investors see it as a sweet spot, especially in the Mid-Atlantic.”
CBRE recently issued an economic forecast predicting that U.S. multi-family investment volume will reach $148 billion in 2021 –
a 33 percent gain over 2020 although still below the record high investment of $191 billion in 2019. In its real estate forecast, Yardi Matrix predicted a “robust pipeline” of new multi-family projects in 2021. It estimates that 765,000 units will be in some phase of development this year and that strong demand “should keep deliveries above that 300,000 mark for the next few years.”
Demand, in part, is being driven by some broad-based demographic trends. A large population of younger Americans are reaching the stage where they are ready to move out on their own or into a larger home. Meanwhile, another large population has become empty nesters and many of them are looking to shed the responsibilities of a house and garden for the simplicity of living in an apartment or condominium.
In turn, those trends are supporting a wide variety of multi-family developments: affordable to luxury, co-living spaces to oversized condos, no-frills buildings to iconic skyscrapers, and all sorts of locations.
“We are seeing urban core projects and projects in cornfields and everything in between,” Kolb said.
In South Baltimore, construction is proceeding “at a very high pace” to complete the 275-unit Alta Federal Hill project, Goodwin said. In D.C. last year in the midst of the pandemic, rent growth and unit absorption slowed in many downtown sub-markets. However, both are proving consistently strong in “inner ring” suburban neighborhoods, especially areas served by Metro such as downtown Bethesda, Silver Spring and White Flint. That demand is supporting mixed-use developments with a direct connection to the Purple Line, such as Design Collective’s recently delivered Lindley project for EYA and Bozzuto’s Chevy Chase Lake project.
Elsewhere, the Metro and new Purple Line are stoking investor interest in other projects.
“Some of our clients’ properties in Northern Virginia are Metro-convenient, so they have been up-zoned,” Goodwin said. “They have office buildings now which will be taken down and replaced with residential, many of these currently on our boards will be five to seven story podium multi-family projects.”
The pandemic, recession, strong housing market and limited land options are increasing developers’ interest in replacing or repurposing buildings, Kolb said. “We are doing infill projects in D.C. where we are removing buildings and infilling with new, multi-family buildings… We are also looking at proposals to do adaptive re-use projects for developers who are exploring the possibilities of turning hotels into apartments or senior living buildings.”
The pandemic and recession can sometimes make projects more challenging to complete. Some projects have experienced delays due to challenges with securing financing or permitting. Shifts in commodity prices, such as the spike in lumber prices, have strained some project budgets. And simply sourcing enough and appropriate materials for large, multi-family developments has proved difficult.
“We recently finished a project where the developer was unable to get consistent furniture and appliances throughout his new apartment building because of supply chain interruptions,” Kolb said. “So from floor to floor, refrigerators, dishwashers, furniture and lobby furnishings varied because he couldn’t find a single source to supply the entire building. That’s something you haven’t seen in the past… But in the end, he was very grateful to get enough appliances and furnishings to complete his project as opposed to being upset about not having consistency throughout the building. People’s perspectives and expectations have changed with COVID.”