The first question a real estate investor must ask themselves is, “Where should I invest?” While some focus on their immediate area, others look for bargains throughout the entire nation. Across the nation, High Peaks Capital maintains connections with investors and real estate experts. In this manner, we may allocate money to the best markets, wherever they may be. As a result, we’ll utilize this post to explore the best markets for brand-new multifamily construction.
We’ll discuss the following subjects in further detail:
- Prerequisites for New Multifamily Development
- Best Markets for New Multifamily Construction
- Final Thoughts
Prerequisites for New Multifamily Development
Market and Population Trends (i.e. Demand)
Above all, the location of multifamily construction is determined by present and anticipated demand. Will enough people be willing to sign contracts at the underwritten rent levels, for instance, if I construct a 100-unit apartment building? If there isn’t a demand for these units, the best apartment complex in the world will either A) remain empty or B) rent out at rentals that are much below market rates (for instance, financing one-bedroom apartments for $1,200 but renting them at $750).
In general, economics and demography are the two main areas that drive multifamily demand. Economic trends include long-term forecasts for a market’s employment opportunities, key employers, auxiliary industries, institutions of higher learning, etc. In short, is this region expanding or contracting? If the former, how quickly?
Economic trends are influenced by demographics, although generational predictions are the focus of these trends. For instance, how will the demand for apartments be affected when Millennials approach the typical first-home-buying phase of their lives? Will the employment of Generation Z affect demand? What is the net migration in a market—is it positive or negative?
You can determine if a market can accommodate an increase in the supply of multifamily complexes by providing answers to these important questions.
Market Rent Comparisons
Market rental comparables, or comps, also have a direct relationship to demand. One of your first tasks when underwriting a new multifamily construction will be to predict your top-line results, or how much rent you can expect to earn. Apartment comparables are often found by developers by unit type (e.g. efficiency, one-bedroom, two-bedroom, or three-bedroom).
Following that, the balance of your operational budget and the full underwriting procedure are driven by these top-line estimates. Your pro forma net operating income is probably not going to be able to raise the cap rate value to a level required for loan qualifying if market comparisons are too low. Or, you’ll need to contribute a lot more money than you had anticipated being accepted.
To summarize, be sure the rents in a market are sufficient to cover the cost of development before considering doing so.
Investment Requirements
The quantity of money you’ll need to invest in a trade, or your capital needs, also affects the market’s choice of products. The highest rents will undoubtedly be found in first-class cities like San Francisco, New York City, and Washington, DC. The money needed to start construction on an apartment complex in one of those locations, however, is often lacking for a new investor. As a result of the excessively high capital requirements, more institutional-level and sovereign-wealth funds are now responsible for executing those agreements.
In contrast, smaller cities in the second and third tiers with increasing demand tend to have much lower capital needs. For example, Richmond, Virginia, will require far less money than New York City for a 250-unit apartment building.
Regulatory Zone Environments
There are certain marketplaces with very severe zoning regulations. To put it another way, getting local communities to approve a new multifamily complex is challenging. Even if a market satisfies the aforementioned requirements, it won’t help you much if you can’t buy a piece of property that is zoned for multifamily construction or qualifies for a streamlined rezoning. Because of this, every market study should go through the regulatory landscape in-depth.
Construction Workers Availability
Construction workers with specialized skills are still not back to where they were before the Great Recession. To put it plainly, the demand for building cannot be met by the labor supply. Furthermore, certain markets are experiencing more severe shortages than others. Examine the local labor market before deciding on a market. Ask several general contractors about their job pipelines throughout your conversations with them. When are they able to start new projects? Do they have problems finding subcontractors?
Your holding charges will increase according to the length of your building term (e.g. property taxes, construction loan interest, utilities, etc).
Costs of Materials
Sadly, all building material costs have increased dramatically in the Covid-19 period. Thus, no market will guarantee that you will discover “excellent offers.” However, certain locations will still have greater expenses than others for many reasons. To get precise cost-per-square-foot hard cost construction estimations before choosing a market for your multifamily project, speak with a range of suppliers and general contractors. As a result, you will be better able to underwrite a deal and make a final decision over whether to proceed.
Best Markets for New Multifamily Construction
Overview
It wasn’t always simple to compile the aforementioned market research. Because they do the research for you, real estate analytics companies, fortunately, gather a lot of the data. A yearly report examining much of the material above is produced by PwC and the Urban Land Institute in particular:
Emerging Patterns in Real Estate 2021 […] offers a forecast on real estate investment and recent developments, real estate financing and capital markets, real estate industries, metropolitan regions, and other real estate challenges throughout the US. […] The interviewees and survey respondents cover a broad spectrum of business professionals, such as investors, fund managers, developers, real estate firms, lenders, brokers, advisors, and consultants.
Through this yearly study, real estate experts and other stakeholders from all around the country may share their insights with multifamily developers. This study should give you sound advice on market circumstances, even while it does not exempt you from performing your market research.
Leading Cities for Multifamily Development
Additionally, this research surveys industry professionals to determine which markets have the best potential for multifamily construction. To put it more clearly, it requests that these professionals rank markets according to the categories of “buy,” “hold,” and “sell.” The top 5 markets for purchase recommendations, as determined by these experts, are shown below:
Raleigh/Durham, NC
- Purchase: 72%
- 20 percent hold
- Selling at 9%
Tampa/St. FL Petersburg
- Purchase: 67%
- 30 percent hold
- Selling price: 2%
Salt Lake City, Utah
- Purchase: 67%
- 27 percent hold
- Selling price: 6%
Austin, Texas
- Purchase: 63%
- 26 percent hold
- Selling price: 12%
Boston, Massachusetts
- Purchase: 60%
- 32 percent hold
- Selling at 9%
Final Remarks
Despite having some of the highest rents in the country, New York City, San Francisco, and Los Angeles also require a lot of wealth to enter. As an alternative, we propose locating the “sweet spot” in these second to third-tier cities with favorable economic and demographic trends.
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Come join us! Email me at mark@dolphinpi.us to find out more about our next real estate investment.