Sometimes we tend to think we are in our own little cocoon here in Germantown, and what goes on in LA, NYC, and Atlanta has nothing to do with us. Well, we are different (our population is stable rather than increasing), but that doesn't mean that macro trends don't affect us. The Great Recession proved that.
All along, Germantown citizens have protested that there are too many "luxury" apartment complexes in various stages of approval in the City, and they have questioned the marketing studies of the developers. Where is the demand? These citizens have always felt that the downturn in the housing market was short-lived, and that the trend towards renting would be reversed. The number of apartment units planned for Germantown reeked of overbuilding. And what happens if the supply of luxury apartment complexes exceeds the demand?
I watched a report on CNBC this morning (not online, will link if one appears) which explained the trends affecting luxury apartments. First let's look at four variables that affect current building conditions:
1. Shortage of skilled labor- Most of us have noticed that contractors are hard to come by, and often won't even return calls. They are simply too busy, and the skilled labor is not available. There are a lot of factors that contribute to that--recent natural disasters, immigration policy, and increasing demand for single family homes.
2. Prices of commodities are rising at an alarming level. Lumber cost has been rising steadily since the great recession. You can select your time frame here and look. I selected six years:
3. Demand for single family homes is increasing, mostly due to demographics.
4. We have had an exceptionally low interest rate environment.
As I now explain, these factors affect the current and future supply and demand for luxury apartments.
Developers have been planning and building luxury apartment complexes all over the country over the last few years, but the projects are often delayed due the shortage of labor. Thus, the finished product is often completed a year or more after the marketing studies are completed. Developers cannot swiftly shift their plans when demand changes. The "numbers" (marketing projections) on each project only "work" if the developments are luxury, high-rent units, due to the high construction costs. Unfortunately, the demand is for lower-priced apartment units. Further complicating the issue is that the marketing studies often only take into account current complexes (as competition) rather than totals of current complexes plus those in various stage of planning.
The low interest rate environment fuels the need for pension funds to find higher-return alternatives than corporate and government notes and bonds, and they have been turning to owning apartment complexes for a stream of income.
All this adds up to a projected oversupply of luxury apartment complexes in the future.
I have been told by several sources that many of the developers of apartment complexes planned for the City did not know of all the other projects that are being planned. The City does not offer that information when approached by developers. Thus the developers' own marketing studies are underestimating the supply. And are the developers here taking into account the 700+ apartment units planned in Memphis by Shelby Farms? LISTEN UP DEVELOPERS--Do your homework! Follow the Planning Commission meetings. Join the Developments in Germantown Facebook Page and check out Developments in Germantown, TN! Citizens, if there are developments in your neighborhood, don't be shy about calling the developer and letting them in on what you know about other competing developments.
Current trends are favorable for single family homes, and unfavorable for luxury apartment complexes. Yet, in our City, approved luxury apartment complex units greatly exceed single family housing approvals.
The conclusion that I reach is that, unless plans are altered, Germantown will likely have a glut of luxury apartment complexes, unless developers recognize the macro trends, and change course.
Please see these articles about falling rents around the country:
This Could be the Year of the Falling Rents
Manhattan Rents Drop Most in Six Years
Could Apartment Rents in New Orleans be Falling?
Apartment Rents are Falling in the Most Expensive Markets
Seattle Rents Drop Significantly for First time this Decade as New Apartments Sit Empty
Denver Neighborhoods with the Fastest Falling Rent
Apartment Rents in Miami are Finally Falling