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Why Incentivize When There’s Nothing to Buy?

ABI Multifamily’s Phoenix are Construction Pipeline. Credit: ABI Multifamily

By Roland Murphy for Arizona Builder’s Exchange

While I tend to lean slightly toward optimism, no one has ever accused me of a rose-colored worldview. Some of the reports that have crossed my desk recently have reinforced my, “That’s good news, but…” default outlook.

Nearly everyone, including Millennials, is tired of stories focused on Millennials. I apologize for putting another in the mix, but this is more important than the latest co-space opening or craft brew launch.

The first piece I want to look at is the August Marcus & Millichap Research Brief. It begins, “After falling to a five-decade low in the second quarter of last year, the homeownership rate is up almost a full percentage point to 63.7 percent in June.”

That, generally speaking, is good news, particularly when in the very next line the report lets us know that rise was due to Millennials finally moving into the market at a higher rate – 35.3 percent.

So, the long-sought-after demographic is finally moving on up, albeit at a slower rate than the market would like, but as a group, Millennials are still firmly in the, “It’s better to rent,” camp.

Still, according to Marcus &  Millichap’s July Research Brief, household formations are rising, and that has always been a driver to move into home ownership.

Always a Catch

There are, however, an entire interstate’s worth of bumps in that road.

The first is rate of absorption and vacancy in multifamily. Vacancy in June was 3.8 percent. In Q2, multifamily developers hit a 30-year high of more than 86,000 units completed.

However, absorption also hit a new high, with nearly 176,000 units being filled.

Another potential pitfall facing the multifamily world is the lack of affordable new development priced for the general workforce.

The ones that exist are mostly full, and very few new ones are getting built.

ABI Multifamily’s most recent Phoenix construction pipeline offered some more interesting tidbits.

Currently, the pipeline shows 82 properties totaling just fewer than 19,000 units under construction. That’s the good news.

The bad news, at least from where I’m sitting, is of those 19,000 units, only 4,000 fall into the affordable or “workforce” range.

So, lots of units are being built, but they’re not doing anything to accommodate the population generating the strongest push on the market.

Complicating matters even further, lots of investors are buying up existing properties built in the 1980s and ‘90s on the outskirts of the blazing hot areas and, rather than doing standard rehabs, fully renovating them into Class B+/A- spaces, delivering prospective renters more space at a lower price, but still pricing spaces outside the range of the average renter. Largely, it’s speculated this is due to those investors gambling construction costs are going to keep increasing, and it’s more cost effective to renovate, even extensively, than to build new.

This is particularly true for hot markets like Metro Phoenix. Case in point, an August 21 article on Bisnow listed Phoenix among the top five “buy” markets for multifamily.

But Wait, There’s More

One could easily figure the scarcity of and demand for multifamily property would accelerate the Millennial drive toward homeownership, particularly when rents can easily be higher than mortgage payments.

It might, if there was inventory on that side of the market.

Marcus & Millichap’s July Research Brief noted the existing home supply in May was 4.2 months at the current page, and homes’ time on market had dropped to a record-setting 27 days.

High demand and high construction costs, combined with the high price of land, also mean high prices for newly built. New homes costing more than $300K make up the largest segment of share of sales, according to the August brief.

When you combine that with accelerating household formation, Marcus & Millichap estimates that nationally, “…demand will likely outstrip the combined single and multifamily supply additions by nearly 100,000 units.”

What’s Next?

What led me down this particular, and particularly confusing, rabbit hole was the recent announcement by Fannie Mae about its debt-to-income ratio. Fannie announced plans last month raise the ratio from 45 percent to 50 percent.

That would normally be a welcome gift to Millennials, who, collectively, are saddled with more than $1T in student loan debt. Keep in mind, their employment levels are generally good, but wage growth is still modest, showing June increase of only 2.5 percent.

So, inventory for first time buyers is scarce and not getting better anytime soon. The same can be said for multifamily, particularly in the workforce price range. Because of construction costs, land prices and high demand for units, those prices are almost certainly going to continue rising.

The two questions I, and several other people much better informed than myself, are wondering is, even if Millennials want to move into homeownership, and they’re actually getting some incentive to do so from major institutions, does it actually matter if there’s nothing for them to buy, and how long will they be willing/able to wait if forces continue to keep them from getting what they want?

True or not, one of the most common commentaries about Millennials is their motivation by instant gratification. They are also widely known for eschewing traditionally standard milestones, waiting much longer to start driving, get married, et cetera.

What’s it going to do to the market if they hit resistance, get frustrated and simply give up the notion of ever owning their own home?

I don’t have the answer, or even a guess, but that’s what’s been eating up most of my bandwidth the past few days, and there’s not a lot of rosy tint outside my office window this morning.


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