Counting Cranes: 5 of the Most Active Construction Markets

A strong employment sector: Check. Solid rent growth: Check. Cultural hubs that have multigenerational appeal: Check.

Metro areas that can check those boxes have been gold mines for landlords since the economy crawled out of the Great Recession. Nationally, rent growth eclipsed 4% for the seventh consecutive quarter in the first quarter of 2016, ­according to Dallas-based Axiometrics, as occupancy came in at 94.8%.

When the economy collapsed, multifamily projects from coast to coast dwindled. So when developers regained their footing, cranes slowly began popping up in every metro. But since construction began, some markets have seen far more activity than others.

Since 2010, the Houston metro has delivered 59,160 units, good for most in the nation, according to Axiometrics. Dallas was close behind, with 56,220 units delivered, followed by the Washington, D.C., metro (42,819); Austin, Texas (31,937); and New York City (29,426). Texas and its 202,737 units delivered since 2010 rank first, more than double ­second-place California’s 87,774 units.

Most developers say the construction boom is driven by demand, and The State of the Nation’s Housing 2016 report from the Joint Center for Housing Studies backs that claim with data that show there are now 9 million more renters than a decade ago. Moreover, the report states, 36% of U.S. households opted to rent in 2015, the largest share since the 1960s. For the time being, developers seem intent to strike while the market is hot, especially in certain areas, although land and construction costs have risen steadily.

We examined the five metros where a submarket has delivered over 9,000 units since 2010. We wanted to figure out what’s really driving development. Is it demand? A combination of demand and strong investor appetite?

The metros we discuss on the following pages—Atlanta; Dallas; Houston; San Jose, Calif.; and Seattle—have their share of similarities and differences, as construction seems to have peaked in some and is picking up in others.

ATLANTA

Twenty years ago, Atlanta hosted the Summer Olympic Games, where ­Muhammad Ali memorably lit the eternal flame to officially kick off the event. But before Ali and athletes from around the world came to Atlanta, a tremendous amount of infrastructure was built for the spectacle, including Centennial Olympic Stadium, where Ali did the lighting and which is now Turner Field, home of pro baseball’s Atlanta Braves.

Now, though, a new Braves stadium is under construction north of ­Atlanta’s heart, in Cumberland, and a massive mixed-use development is in the works nearby. The project, The Battery Atlanta, will feature 531 luxury apartment units, all built by locally based Pollack Shores Real Estate Group. It’s one of four projects the firm has under construction in the metro (about 1,350 units total), and the company just closed on two more sites with a combined total of more than 680 units.

“There’s a lot happening here,” says Michael Blair, managing director of development for Pollack Shores, adding, “There are many more people who are interested in a luxury rental option.”

The Buckhead neighborhood, a more-established destination just north of the city’s downtown, has been booming in recent years, industry professionals say. Post Properties opened a 340-unit building there last year that’s exceeded its pro forma estimates, chief investment officer David Ward says, and was more than 80% leased in June, with expectations of being fully leased by the fall.

Post is also erecting a 360-unit building in Atlanta’s Midtown that’s ­expected to open next year, as well as a 438-unit project next to Centennial Olympic Park set to open in 2018.

North American Properties (NAP) launched its multifamily division in Atlanta less than six years ago, and Richard Munger, VP of development, says the market has been strong. NAP currently has two projects in the works in the city, including a massive, 86-acre development in the wealthy suburb of Alpharetta that will house 526 apartment units when finished. The first phase of the community has opened, and Munger says the median age of its renters is 46, with household incomes around $250,000. The demand, he says, is evident.

The other NAP project under construction is a 244-unit building in the Old Fourth Ward, transformed in 2014 when a former Sears distribution center was converted into a vibrant mixed-use development, Ponce City Market.

Major companies, including UPS, Mercedes-Benz, and Porsche, have moved their operations to Atlanta in recent years, helping fuel job growth, explains Mitch Harrison, CEO of First Communities. The Atlanta-based third-party manager manages roughly 14,000 units there. “Atlanta has always been our bread and butter, but we’ve seen a tremendous amount of growth in terms of new business, new clients, since 2008,” he says.

Can this torrid pace of construction continue? ­Harrison says many of the popular neighborhoods for developers have gotten ultra-competitive post-recession. Ward says the city has absorbed the new units that have come on line in recent years but is prepared for a slowdown.

“Starts are still accelerating, so while I don’t think we’ll have a major problem, there are probably some markets that are getting a little bit soft,” Ward says. “I sense it will be a little tougher going in ’17–’18, but fine long term.”

If developers continue to build unique projects, people will pay to live in them, Blair adds. “Even if it doesn’t continue on a pretty incredible uphill climb that we’ve seen since the recession,” he says, “it feels like the demographics are really strong for continued steady growth.”

See next: Dallas and Houston

DALLAS

In most cities, when developers came back after the recession, they concentrated their efforts in the downtown core areas where the walkable lifestyle and unique amenities would always attract renters. The story was no different in Dallas: Any lots left from the last cycle in the city’s core Oaklawn and Uptown submarkets were gobbled up in the first few years back.

What is unique for Dallas this cycle is the number of high-rise projects. Most of the sites left in Dallas are a half acre to a full acre, but not much bigger. The cost of such a small site has forced developers to go vertical to add enough units to make the deal pencil out. That’s also pushed rents, but everyone’s still waiting to see how the product performs.

“Those higher-rent, higher-cost, higher-density buildings have not been delivered yet,” says Matt Enzler, Trammell Crow Residential’s managing director of development. “So that story is yet to be told. The stuff that has opened has done really well, exceeded the pro forma, but we’ll see how deep that market is.”

The high-rises are being delivered in submarkets with average incomes of $100,000, and Enzler estimates the buildings are mainly inhabited by renters by choice who are only spending 12% to 20% of their income on rent. With that balance, the higher rents haven’t hit an affordability ceiling yet.

The majority of the new high-rises are set to deliver at the end of this year into early next year. While developers wait to see how they do, they’ve branched out farther across the Dallas metro. Uptown-adjacent communities have seen a spur of projects, largely because residents could save as much as $400 a month by living a mile farther out from downtown.

Dallas’ urban growth has only been a small percentage of the city’s overall metro growth. The Oaklawn submarket accounted for just 15.8% of all multifamily deliveries between 2012 and the first quarter of 2016. The Plano–­McKinney submarkets accounted for 14.9%.

“There’s a tremendous amount of investors focused on high-growth suburban submarkets in Dallas,” says Rick Perdue, managing director of Mill Creek’s Dallas operations.

Employers including Toyota, JP Mor­gan, Liberty Mutual, State Farm, and Raytheon have all moved their offices­ along the Dallas–Plano corridor and brought thousands of jobs with them. The surrounding submarkets are creating pockets of walkable neighborhoods from where, Perdue suggests, renters and home buyers alike are happy to drive to work five days a week and then be able to ditch the car for the weekend.

Zoning and entitlements in the entire Dallas–Plano metro area have gotten tougher, though, limiting what developers can do. Enzler notes that Plano has essentially put a moratorium on new multifamily development for now.

The city of Dallas has also developed a task force in the past two years to address the city’s affordability issue. Developers on the task force are weighing how to create affordable properties without hampering development. City Hall is analyzing new entitlements for affordability requirements, making developers cautious about sites that would possibly need to go through a re-­entitlement process.

Overall, though, the Dallas market is healthy, and developers hope to see continued record absorption rates on par with those of the past four years.

“As long as the jobs continue to come to Dallas, we should continue to be in good shape,” says Perdue.

HOUSTON

When the recession struck, Houston remained a powerhouse, thanks largely to the oil industry. It only lost one in 22 jobs when the crash hit; was the first city to recoup all the jobs it had lost; and even added two jobs for every job it had lost, according to the Bureau of Labor Statistics.

Houston’s metro area has been the most active city in the country for multifamily residential development, with nearly 60,000 units being delivered since 2010.

When that development is mapped out across the metro, the gravitational pull of the Energy Corridor is clear: Development is concentrated in the downtown submarket of Montrose–River Oaks, just slightly west of the central business district. From there, the development hot spots stretch farther west, out along the Corridor.

The Montrose–River Oaks submarket has experienced the second-most deliveries of any submarket in the country since 2010, with 12,886 units.

“Montrose is a great neighborhood to get into because it’s a central location; it’s a really cool neighborhood; it’s got some of the best restaurants in town; and it’s got a lot of great nightlife,” says Jeb Cox, managing director for Mill Creek’s Houston division.

At the onset of the recovery, city officials in Houston also started an initiative to revamp Houston’s downtown areas into a pedestrian-friendly community. Residential developers who participated in the initiative to provide different elevations with prominent sidewalks were given a $15,000 tax credit per unit built.

Cox attributes Houston’s shift from podium- and wrap-style communities to higher-density projects to this urban initiative, along with the escalating costs of land, labor, and construction.

Yet, all of that building accounted for just 21.8% of all unit deliveries in the Houston metro area. Cyrus Bahrami, managing director of South Texas for Alliance Residential, estimates nearly half of the multifamily residential deals he’s made this cycle in Houston were actually suburban, with more than a few along the Energy Corridor.

There isn’t much development going on in Houston now, though. Since oil prices plunged last summer, apartment construction in the metro has been on an indefinite pause as investors and developers wait to see if the current supply will be absorbed. “It actually wasn’t a bad pause, because we had so much development going on,” says Bahrami.

Right now, one-month-free concessions are popular. Some developers are even at two months free. But considering that rents have risen 13.4% in the past four years in Houston, the rents these communities are fetching now are on par with or better than the level at which the projects were underwritten, even with the concessions.

At one project that Alliance opened for pre-leasing recently, the company rented 45 units in the first month, which is still a healthy pace given current market conditions.

Of the few projects still under way, most are concentrated in the downtown core markets, on what Cox describes as “trophy sites.” Even if developers find an equity partner, they often have problems securing a construction loan. But eventually those lenders will come back.

“We’ve got close to 7 million people in our market and we’re predicted to add another 1.5 million in the next 15 years,” says Bahrami. “[Houston] is a great place to live and work: low cost of living, very entrepreneurial. I see those as continued drivers for residential space.”

See next: San Jose and Seattle

SAN JOSE

San Jose has had a plan on its books since the 1980s to restrict development in the North San Jose area in an effort to ease regional traffic concerns. In 2008, the Vision North San Jose plan was formed, allowing for 32,000 residential units in four phases. The city is now in the first phase, which permits 8,000 residential units and 7 million square feet of industrial space.

Michael Brilliot, division manager for the city’s Planning, Building & Code Enforcement division, says that before phase two of the plan can commence, the designated amount of residential and industrial space in phase one must be developed.

The problem is, however, that the residential development has easily outpaced the industrial. Currently, 7,940 housing units and approximately 1.2 million square feet of industrial space have been built. “If you allow all of the residential to go forward regardless of whether you’re building the employment uses, all the residential will get built very quickly and the employment uses won’t get built,” Brilliot explains.

That presents another problem. “One of the dangers is that there’s such demand in housing that housing developers will [often] pay a lot more for land than commercial developers in this town, so that, then, discourages anyone from building commercial development because the landowner is going to be looking to sell it at housing prices,” Brilliot says. “Commercial developers can’t make their projects pencil [out] paying housing prices.”

North San Jose is the city’s primary employment hub, mostly tech and manufacturing, Brilliot says. According to Axiometrics, 65.7% of units delivered in the market since 2012 have been in Northeast San Jose.

Mark DeGraff, a senior regional property manager at Austin, Texas–based Pinnacle, says there was pent-up demand for housing following the recession. A 271-unit property Pinnacle manages in North San Jose that opened in October was fully leased in five months, he says, versus the typical eight to 10 months.

The city’s downtown has had a history of underdevelopment since the 1950s, Brilliot says, so there was no need for restrictions there. It wasn’t until the 1990s and the Internet boom, he adds, that apartments started to be built in the area. “If housing wants to build downtown, then that’s great; let’s jump on the bandwagon as a way to incentivize the growth of downtown overall,” he says of the city’s mind-set decades ago.

But now, the amount of development is causing a pause, he notes, as more units come on line. “It’s really over the last year and a half that people are like, ‘Whoa, maybe we have too much of a good thing and we need to be more thoughtful on where [development] should go and where we want to reserve areas for employment,’ ” he says.

Is there a danger of San Jose being overbuilt? Wait and see, says DeGraff. “It’s amazing to see that even with all this new development, all this supply, there’s not a lull that we’ve seen in the market,” he says. “At least, not yet. I have a feeling we’ll probably see a reduction in occupancy … . It’s just hard to say when.”

For Leslye Corsiglia, executive director, SV@Home, an organization advocating for affordable housing in the Silicon Valley, the region as a whole isn’t creating enough housing to keep pace with the number of jobs created.

“We also need more subsidies,” she says. Of the 8,000 units released in phase one, less than 7% were affordable.

SEATTLE

Amazon, Alibaba, Ebay, Expedia, Facebook, Tableau, Twitter, Zillow. These are just a few of the giant tech corporations that either have an established footprint in Seattle or have just recently planted some very large roots there. For the most part, these employers have been concentrated in Seattle’s downtown core. An estimated 15 million square feet of office space have been added in Seattle’s South Lake Union area, with Amazon occupying about 60% of it.

What’s more, these various employers have added roughly 215,000 jobs to the Seattle market since 2010. Residential developers have been working to build homes for those workers over the past several years.

According to Axiometrics, the downtown submarkets of Queen Anne and Capitol Hill have accounted for 39.9% of all deliveries in the Seattle MSA since 2010.

“Jobs in the market are good, and people want to live downtown as opposed to some distance away where they’re going to have to take public transit or commute,” says Washington Multi-Family Housing Association executive director Jim Wiard.

Vancouver, Wash.–based Holland Partner Group has built seven communities of more than 100 units each in the downtown core this cycle, with another four in the works now. Tom Parsons, president of Holland Development, says most of the residential construction has concentrated in the submarkets surrounding the business growth.

“There’s a lot of desire to live in these peripheral neighborhoods like First Hill, Capitol Hill, and Queen Anne. I think those all have somewhat of a village–neighborhood–community feel. It’s different, less urban,” Parsons says.

Holland Development recently completed 815 Pine, a 386-unit project near the I-5 expressway, where residential construction has been concentrated. Parsons notes that the only areas left for similarly large, institutional-­size projects are between Pine Street and South Lake Union.

Luckily for developers, high-paying tech salaries enable these incoming employees to afford the expensive new, amenity-rich product. With Seattle’s area median income of $71,237, even developers offering 20% of a project’s units at 65% to 85% of the area median income (AMI) means they’d be looking for incomes ranging from $46,000 to $60,000.

Development is concentrated around the job core for two primary reasons: There’s nowhere to park cars in the city, and having to rely on the bus routes could possibly quadruple the length of a resident’s commute.

Most people have to ditch the car altogether and choose living in a location from which they can walk, or at least bike, to work. Seattle has invested nearly $36 million in the past four years in bike-friendly improvements throughout the city, such as protected bike lanes.

The city is starting to feel the crunch of development, though. The problem in the Emerald City isn’t concessions or over­development—it’s construction costs.

“The construction costs, the land costs continue to go up through this cycle. That’s going to create a tipping point at some point where construction is going to start phasing back a bit,” says Wiard. “We’re probably close to that now. If we were to pinpoint where we are on the roller coaster, we’re probably at the peak now and turning downward just a little bit in the market.”

Nonetheless, Wiard anticipates another 40,000 to 60,000 units still in the pipeline for Seattle.

Seems those cranes aren’t out of the landscape just yet.