Thursday, June 7, 2018

Macro trends in Apartment Building Point to Oversupply of Luxury Apartment Complexes

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


  1. Thank you for keeping the public informed on this! I don't think enough people realize how problematic this can be for Germantown

  2. Why do you suppose that developers see the market differently than you do? If you're right and they're wrong, they stand to lose a lot of money. Do you think they would want to go through with projects that lose money?

  3. Some of them do not know about the other developments being planned in the area, and are not counting on those in their marketing plans. In several cases residents have told me that they talked with the developers that had no idea what was going on in the Germantown Planning Commission. They need to pay more attention, and residents should be proactive in informing them. The last thing we need is empty apartment complexes, such as is happening in Seattle. I doubt if Seattle developers wanted to lose money, either. It is important to look for signs of bubbles, but lots of developers are negligent, and simply follow trends until bubbles occur.

  4. I have a hard time believing that successful businesses don't know what's happening in the area. They didn't become successful by dumb luck. If you read the materials they publish in the newspapers or talk about in the various commission meetings, they always talk about the area as a whole; they don't just stop at city limits. So, it seems really, really hard to believe that there's any developer out there who isn't in touch with what's happening in the area.

    I'm interested to find out what you know about developers and their marketing plans. Do you have access to their internal plans and research? Instead of posting conjecture from non-local sources (Manhattan and Denver don't seem very close to Germantown), a great blog post would include information for our own area -- and maybe some of this inside information you claim to have, too.

    Let me ask -- if it's so easy for regular Joe residents to know the market, why do you suppose that developers don't? If they don't know the market is in such bad shape, they're risking an awful lot of money. Why do you think they would do such a thing?

  5. I will repeat this: I have talked to residents in the Forest Hill Heights area who have spoken with developers about their projects. In the course of the conversation the residents mention other planned projects in the area, and those developers act surprised, as if they had not heard of them. Now does this concern me, yes it does. For one thing the developers apparently seemed concerned (according to the residents). Yes, they should have known, but didn't. I don't know what their marketing studies showed but I bet they didn't include competing projects they did not know about.

  6. Asking for your opinion, why do you suppose that developers didn't account for the market (as you've stated here)? What do you think they would have to gain from operating in that fashion?

    1. Actually, I was and am astonished by that. There is no explanation.

  7. Is there any way you can name some of the sources regarding the developers knowledge of the area? It seems hard to believe that they would not be even slightly in tune with what is going on in the area. Thanks!

    1. At this time, I do not have permission to share that information. They must know now, though.

  8. What about the success of the Crosstown Concourse just last year? Wouldn't you say that would be a good prediction of what would happen in Germantown? More than 90% of space in that massive building is leased. It's not just luxury apartments. There is a mix of small businesses and shopping as well. I feel like it really shows some potential.

  9. Infill projects using existing buildings in a transition neighborhoods is a good way to use tax incentives. Vacant land in high rent districts is not. I do not see anything comparable to the old Sears Building in Germantown.