Today apartment occupancy is reaching record levels. Rents are rising. The question is when will new supply appear. The only available source of new multi-family development financing is the HUD 221(d)4 program. This is a good program- 40 year loans at very competitive interest rates. One of the objections by multi-family developers is the Davis-Bacon requirement. This is the equivalent of requiring union construction workers. Most garden apartments and town houses are built “open shop”- a combination of union and non-union sub-contractors.. Construction bids are at there lowest in many years. These lower costs can take many pending developments off the shelf and start the shovels digging. The threat of 100% union workers wages can increase these low construction bids by 15% to 20%. This will put some of these proposed developments back on the shelf.
Many developer’s organizations are tightly organized with no bureaucracy. The mountain of paper work required for HUD financed developments requires an in house bureaucracy. Formerly new apartment developments were financed by conventional lenders who did not require this mountain of paper work. Many developers do not feel comfortable today increasing their overhead.
There is a huge new demographic group, eco-boomers, who will soon be apartment occupants. Their concept of apartment living is different than previous generations. For example, their constant use of the Internet, wi-fi, cell phones, and the many new new electronic devices requires new and different electrical connections. Many successful apartment developments today will become functionally obsolete when they can not meet the eco-boomers needs. it reminds me of when air conditioning an apartment was optional. Soon those apartment houses that did not offer air conditioning were obsolete.
In Europe housing is being developed that reduces utility bills by up to 90%. Soon this will be demanded by budget stressed tenants.. The apartment owners will face the option of reducing their bottom line by paying for all tenant utility bills, converting the development, or being functionally obsolete. This reminds me of 30 years ago when HUD required the owner of subsidized housing to pay all utility bills. When this was changed to the tenant paying, the individual energy use went down 67%.
Housing is changing. This will create huge markets for new housing development and an even bigger market for the conversion of existing housing to what consumers will demand.
This can only happen when conventional lenders get back to making apartment loans on terms that make these proposed developments feasible. BANKS TODAY borrow funds and pay less than 1% interest. Imagine the great AFFORDABLE developments of all types that could be created with developers borrowing on similar terms.