Let's head downtown

In January 1965, pop singer Petula Clark topped the music charts with the song "Downtown." The bouncy, up-tempo number was an ode to the joy and energy that one could find in a metropolitan city's center. For many of the intervening years, however, the sentiment behind the song seemed hopelessly dated.

As residents flocked to the suburbs, many downtowns resembled ghost towns when the workday was done. Recently, though, that has begun to change. Recognizing that many people are fed up with the stress of long commutes to and from work, apartment developers have started building in the downtowns and other older urban areas of cities - and are finding their properties to be big success stories.

The trend toward urban construction is not the only topic on the minds of the multifamily community. Industry members also point to the return of the high-income renter, the good health of the apartment market and the continued popularity of apartments as investments as major issues for the multifamily sector in 2000.

The city is in Statistics compiled by the Washington, D.C.-based National Multi Housing Council (NMHC) from the 50 largest metropolitan areas help illustrate the reurbanization trend. According to the NMHC, 55% of housing permits issued in "central cities" in 1999 were for multifamily units; compared to 33% in 1992. (Jack Goodman, vice president of research and chief economist at NMHC, notes that each apartment unit counts as a permit, and "central city" is defined as within the borders of the major city of a metropolitan area.)

Goodman points to the slight increase in the percentage of multi-story apartment buildings as evidence of the move back into the city. According to U.S. Census Bureau figures, 11% of buildings built in 1999 had three or more stories, compared to 8% in 1994. "That would tend to be consistent with some sort of movement toward more close-in locations where you tend to build up rather than out because land costs are typically higher in urban locations," says Goodman.

The move back into older, more urban areas of cities is nationwide in scope, according to industry observers. In fact, the trend is occurring in almost every market with a population of at least 1.5 million people, says Ron Witten, president of Dallas-based M/PF Research.

"It's not just a phenomenon of the older cities, of the upper Midwest or the Northeast," he says. "It's not just a phenomenon of the high-growth Southern cities. This inward movement is consistently evident across the country."

Harvey Green, president and CEO of Palo Alto, Calif.-based Marcus & Millichap Real Estate Investment Brokerage Co., says that the reurbanization trend is particularly evident in the markets of Southern California; Northern California; Denver; Chicago; Dallas; Austin, Texas; the Northeast; and the Southeast.

Just as the move toward the urbanization of apartments is widespread in terms of geography, so it is in terms of age. Speaking of Philadelphia, Joe Sweeney, vice president of Philadelphia-based Legg Mason Real Estate Services, says he sees "a mix of empty nesters, professionals, young couples and even some families" moving back downtown.

Part of the trend's genesis is simply location preference. Weary of time-consuming and often mood-altering commutes along streets and highways designed for much smaller populations, many people hunger to live in a place where their jobs and recreational opportunities are not so far away.

"People are making these long commutes and saying, 'This is ridiculous. I want to move back into town, where I'm 10 minutes from my job and where I've got a lot of things around me that make my life a lot more interesting,'" says Herb Chase, senior vice president of Northbrook, Ill.-based Grubb & Ellis' Apartment Services Group, who is based in Atlanta.

A more supportive governmental environment in some cities is another component of the reurbanization of the apartment landscape, say industry members. For example, the Philadelphia City Council passed a tax-abatement program in the late-1990s. Under the program, building owners who convert older properties to apartment facilities will have no increase in their real-estate taxes for 10 years.

"Some of the more enlightened governments are understanding the argument that smart growth really does mean apartment construction and other pro-density policies that reduce traffic and reduce strain on public resources," says Jay Harris, vice president of property management at NMHC.

Jonathan Kempner, president of NMHC, says the buzz about infill sites in urban areas is undeniable. "A lot of our key members are focused substantially or exclusively on that," he says. "It seems to be a winning proposition in that the demand is there, and from society's point of view, it is an excellent use of a scarce resource such as land. Plus, it is very much consistent with the whole smart growth movement, which is important as a political issue."

Atlanta-based developer Post Properties Inc. has shifted its focus to urban development. The REIT recently opened its 188-unit Post Parkside community in midtown Atlanta and is also building in urban parts of Washington, D.C.; Charlotte, N.C.; and Tampa, Fla., among other cities. And Bill Paulsen, chairman and CEO of Charlotte-based Summit Properties, also a REIT, says more than half of his company's future projects are urban facilities.

What dissuades some developers from moving into a city's downtown or urban market is that the projects can be very difficult and expensive, the supportive attitude of some local governments notwithstanding. When building in urban locations, developers must often deal with strict zoning requirements on building heights, parking ratios, setbacks from sidewalks, etc., says Paulsen.

"Some developers realize the length of time it takes to actually get these deals together and may instead choose to go back out to the suburbs where it is a little easier," says R. Byron Carlock Jr., chief investment officer of Post.

Suburban development not dead The multifamily industry's increasing focus on urban, infill properties does not mean the end is near for suburban apartment properties. Far from it, say industry members. "I think the outlook for suburban properties is still very good," says Paulsen. "The majority of people still want to live in the suburbs."

On a nationwide scale, the rent growth of suburban properties has been held down somewhat during the past 18 months because many complexes entered the lease-up phase at the same time, which led to rent concessions, says Witten. New apartment starts were down slightly in 1999, by 6% to 8%, he adds.

"As we see lessening construction combined with the fact that more of it is focused on urban infill, I think we will begin to see the supply-and-demand balance for suburban product move somewhat more favorably late this year and into 2001," says Witten. "For 2000 in most markets, there is still quite a bit of new product in the pipeline for delivery in the suburban markets."

John Brown, senior vice president of Grubb & Ellis' Apartment Services Group in Atlanta, says that certain suburban properties still have the strong interest of developers and lending institutions. "Far and away the leader right now in terms of performance and interest from both the developers and the lending institutions would be the infill, and second would be the really high-quality suburban locations that have good job growth, good commercial growth around them," he says. Atlanta and Denver are prime examples of that phenomenon, he adds.

Return of the high-end renter As the urban trend and the various issues surrounding suburban properties unfold, high-end households, meaning those earning more than $50,000, are returning to the apartment market, note industry observers. According to NMHC's Goodman, high-income households are the fastest growing segment of the rental population and currently account for 20% of renters. Low-income households - those earning less than $20,000 per year - account for 40% of renters in the United States. Middle-income households, those that make between $20,000 and $50,000 per year, constitute the remaining 40%.

The realities of the modern-day work environment often mean that many well-off residents are simply choosing to rent instead of buy. "What we're finding is that more people who have very mobile lives - where they are maybe working for a company but are moved around every two or three years - are choosing to rent a luxury apartment than to purchase a home because the home purchase costs are so great, and renting is so much easier," says Harris.

Georgia Murray, principal of Atlanta-based Lend Lease Real Estate Investments who works in the company's Boston office, echoes those sentiments. She also notes that many twenty- and thirtysomethings, particularly those in the high-tech industry, have heavy workloads and simply do not want the burden of maintaining a home. "I think there's a general sense that people are choosing apartments as a lifestyle," she says.

The return of the high-end renter is reflected in some apartment statistics, says Goodman. According to U.S. Census Bureau statistics contained in an NMHC report, the average size of apartments built in 1999 was the largest ever at 1,105 sq. ft.

Due to the increased presence of high-end renters, many luxury complexes are offering an ever-more impressive array of amenities (See our resident retention story on page 100). Concierge services like dry cleaning, running short errands and even walking a resident's dog are not uncommon, says Harris. Also, developers are paying even more attention to such features as business centers and high-speed Internet access, which are important for telecommuters, he adds.

"People are so time-starved these days that they are willing to pay for the convenience of having a 24-hour concierge," says Britt Slone, senior vice president of the Northwest Division of St. Louis-based McCarthy Building Cos., which is building several apartment high-rises in downtown Seattle.

A healthy market, a popular investment Industry members and observers are very positive about the state of their industry. "The overall story is that the health is good and it has been for a number of years, and there hasn't been any marked change in the health of the industry," says Goodman. "There are always local markets that are doing better than the others. But when you average through everything, the national story is one of continued good health in the apartment market."

Grubb & Ellis' Brown seconds those thoughts. "We are in a very healthy equilibrium between supply and demand for the most part across the country," he says.

Given these conditions, apartments are attractive investments. "In spite of increased construction and rising home ownership rates, apartments remained a stable investment in 1999," notes Marcus & Millichap's 2000 Real Estate Forecast. The study also reports that "total apartment returns have remained in the low teens for the past five years and near 10% for the last decade . . . the stability of income streams and continued investment opportunities, particularly for Class-B and affordable housing properties, make this an attractive sector." The national vacancy rate in 1999 was just less than 7%, the report adds.

The relatively short-term leases found in apartments make them a popular investment, say industry members. Frequently expiring leases allow apartment owners and managers to keep pace with market rent increases, notes Grubb & Ellis' Chase.

"Apartments are very much the dependable tortoise that isn't perhaps as sexy as some other real estate sectors," adds NMHC's Kempner. "But at the end of the race, the apartments are usually looking back at the other sectors rather than looking ahead."

As for the type of investors in today's apartment market, Chase predicts a growing presence of pension funds. "A lot of [pension funds] are now allocating up to 50% of their total dollars for the year 2000 to be put into multifamily acquisitions, which is a huge change for them," he says. "Some of them were only 5%, maybe 10%."

What does the future hold? The future of the apartment market depends to some extent on the the nation's economy. But, an economic downturn will not spell doom, predicts Goodman. If wages and prices spiral, and interest rates spike, apartments will remain solid performers for investors for several reasons, he explains.

People who in better economic times might have become homeowners will be looking to rent, he says. Secondly, an increase in interest rates will mean less construction of new communities, which will increase the value of existing properties.

"Apartments aren't immune to what is going on in the macro economy, but there are a lot of shock absorbers," says Goodman.

With all of the dynamics of the modern apartment market, industry members feel good about their world. There is another factor that makes them even happier, according to Summit's Paulsen. College enrollment has grown substantially during recent years. "That means there's going to be a whole new wave of household formations," he says. "So I think that demand for apartments will generally increase over the next 15 years."

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