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CoStar Sounds Early Warning On Multifamily Development

From CoStar

The real estate analysts at the CoStar Group worry that the growth in multifamily development may be too much of a good thing.

“Apartment construction has been on a tear in certain markets,” CoStar says. “With the inventory growing at more than four or five times the national rate, vacancies will most likely increase.”

CoStar has picked out the apartment markets with the highest levels of construction currently underway compared the existing inventory of apartments. Raleigh, N.C., is at the top of the list, followed by San Antonio, Texas, and Austin, Texas. In all three of those cities, the number of apartments underway is more than 5 percent of the total existing inventory.

But CoStar worries the apartments now underway are just the beginning of an overbuilding boom. “It is not this wave of supply that we are worried about—it’s the next wave of supply that could swamp fundamentals,” says CoStar.

CoStar found that apartments currently under construction make up 1.4 percent of the total apartment inventory in the top 54 markets. Apartment developers are now far ahead of the developers of other property types. “New office construction makes up only 0.8 percent of the total inventory,” CoStar says. “New warehouse construction also makes up only 0.8 percent while new retail construction makes up only 0.6 percent.”

The question is whether the number of apartments under construction is oddly high, or whether the volume of everything else under construction is oddly low.

Across the U.S., in the decade before the crash, developers finished an average of about 132,000 apartments a year, according to a tally from Reis Inc., that includes institutional investment quality properties, but not government-subsidized affordable housing or other non-investment-quality multifamily. The total inventory of apartments averaged 9.3 million over the same period.

That works out to completions that averaged 1.4 percent of the total apartment inventory every year. Since a typical apartment property takes two or more years to build, makes the current average nationwide level of construction noted by CoStar seem significantly below average.

CoStar recommends that developers avoid trouble in the future by not overbuilding in a few markets. “The impact on top-tier markets, where most supply is currently coming on line, could be mitigated, though, if developers explore secondary markets where they can still find reasonable value and income.”

The apartments markets with the highest levels of construction compared to the existing inventory of apartments are mostly smaller cities with relatively low barriers to development. Many of the metros at the top of CoStar’s list also top the charts in terms of employment figures.

– In Texas, more than 8,000 units are underway throughout four major submarkets (Dallas, Houston, Austin and San Antonio, and many more projects are in the pipeline. Vacancy rates, which have reached historical lows in the metro, will reverse trend over the next year as Austin struggles to absorb the new supply, according to CoStar.

– Raleigh is leading the way with new apartment construction, which makes up more than 6 percent of the total apartment inventory in Raleigh, and nearly double its historical average, according to CoStar.

Home Builders Forecast 2013

From Florida Realtors:

LAS VEGAS – Jan. 23, 2013 – The housing upturn that took root last year is expected to pick up momentum in 2013, but headwinds along a number of fronts could impede the pace of the recovery, according to economists at the International Builders’ Show in Las Vegas this week.

“Nearly every measure of housing market strength – sales, starts, prices, permits and builder confidence – has been trending upward in recent months and we expect to see gradual but steady growth along these lines in 2013,” said NAHB Chief Economist David Crowe.

In particular, Crowe said house prices are up nearly 6 percent on an annualized rate over the past 10 months, and that “this has been a trigger for demand to return. People feel comfortable if they buy a house that it will appreciate, not depreciate, in value.”

Other factors that bode well include low mortgage rates, strong housing affordability, rising household formations and the fact that two-thirds of U.S. housing markets can now be considered improving, according to the NAHB/First American Improving Markets Index. For the past five quarters, housing has acted as a net contributor to the economy, steadily increasing its share to 12.8 percent of economic growth in the fourth quarter of 2012.

However, Crowe said builders continue to face challenges, including stubbornly tight mortgage lending conditions, inaccurate appraisals, rising materials prices and a declining inventory of buildable lots.

Moreover, continuing gridlock in Washington over how much more fiscal tightening is needed to stabilize the debt-to-GDP ratio, along with calls by some policymakers for major changes to the mortgage interest deduction, threaten to negatively impact consumer confidence and future housing demand.

Setting the 2000-2003 period as the baseline benchmark for normal housing activity, Crowe reported that residential remodeling has returned to previously normal levels, and that remodeling is expected to post a 2.4 percent increase in 2013 over last year.

Meanwhile, multifamily production, which posted a 273 percent gain from its fourth quarter trough of 82,000 units in 2009 to 306,000 units in the final quarter of 2012, is expected to reach a normal level of production by 2014.

The single-family market, which has the farthest to go, was running at 44 percent of normal production in the fourth quarter of 2012. Single-family starts are expected to steadily rise to 52 percent of a typical market by the fourth quarter of this year and 70 percent of normal by the fourth quarter of 2014.

NAHB is forecasting 949,000 total housing starts in 2013, up 21.5 percent from 781,000 units last year.

Single-family starts are anticipated to rise 22 percent from 535,000 last year to 650,000 in 2013, Crowe said. They are expected to jump an additional 30 percent in 2014 to 844,000 units.

On the multifamily side, NAHB is anticipating that starts will increase 22 percent from 246,000 units last year to 299,000 in 2013, and rise an additional 6 percent to 317,000 units in 2014.

© 2013 Florida Realtors®

County may start looking closely at business park

From the Gainesville Sun:

As Alachua County negotiates with a local raceway on relocating its fairgrounds, the plan to redevelop the current fairgrounds site as a business park is still in the early stages of development.

The National Hot Rod Association, which runs the Auto-Plus Raceway at Gainesville, better known as the Gainesville Raceway, is negotiating with the county over establishing a new fairgrounds there.

The fairgrounds’ current site, located at 3100 NE 39th Ave., just south of Gainesville Regional Airport, was marked for redevelopment by Plan East Gainesville, a special area plan on which the county and the city of Gainesville collaborated. The document suggested the fairgrounds’ relocation, which would make room for a business park in east Gainesville.

The county has a draft master plan for the future business park, but the project is pretty much on hold while the fate of the fairgrounds is determined, Acting County Manager Richard Drummond said.

The draft plan lays out a property configuration implementing a mix of development uses, including airport-support operations as well as retail, hotel and office space.

Knowing the park is a workable idea, it is time to expand it from a sketch to a model the marketplace will embrace, Drummond said.

The plan was developed with input from the Gainesville-Alachua County Regional Airport Authority, which is building a new access road at the airport that could also offer entry to the future business park.

The airport authority will complete its new access road this year, which could be used as an entry point for the county property, airport CEO Allan Penksa said. The airport authority has about 40 acres of land near the current fairgrounds site it is looking to develop for both aeronautical and other uses.

The airport and county could benefit from working together on developing the business park and marketing their respective properties, Pensksa said.

County staff will focus on conducting market research in the coming months to determine what kinds of businesses would be interested in locating there, Drummond said. The site also will be evaluated to determine infrastructure and other needs.

The county did a market study in the mid-2000s and will create an updated one over the next nine months or so regarding the kinds of uses, such as manufacturing or retail operations, that would be a good fit for the site, said Chris Dawson, senior transportation planner with the county’s growth management department. Its staff is in the process of drafting a scope for the study.

“There’s a lot of factors that have changed just in the economics of development in Alachua County,” Dawson said. “There are a lot of trends that have changed.”

Gainesville’s Innovation Square, for example, could impact the kinds of companies that are considered for the park.

With input from the new market study, staff can design a better plan based on the users they anticipate, he said. Manufacturing companies would have different site needs than retail or office-centric ones would.