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Glut of apartments raises concern

Updated: September 7, 2012 - 2:24 pm

Posted: September 7, 2012

by philip newswanger

A Richmond public relations and marketing group specializing in real estate is alarmed that too many apartments are being built in Virginia, including Hampton Roads.

If it continues, areas of the state, mostly in the dense metropolitan regions, will be flooded with apartments, leading to a glut, much like rise and fall of the housing market, the group says.

"We [aren't] saying that there's a bubble about to burst in the next few months," said Andrew Ryan, a partner with Commonwealth Partnerships Group in a meeting with Inside Business.

"Rather, based on trends and developments we were seeing throughout the state, including Hampton Roads, we wanted to raise a flag about a potential glut of apartment supply, which could create a bubble, especially as new apartment projects continue to be proposed and built."

The Census Bureau's quarterly data on rental vacancy rates shows Hampton Roads' rental vacancy rate at 14.4 percent, a big jump from the first quarter 2012 rate of 6.8 percent, Ryan said.

Old Dominion University's 2012 Multi-Family Market Report found that the Hampton Roads area "saw a decrease in demand in 2011" in terms of apartment units absorbed.

"According to the report, this rate was less than half the rate of absorption in 2009 and 2010," Ryan said.

"The Census Bureau's statistics on the high vacancy rate coupled with the soft demand coming from the ODU report struck us as potentially alarming, especially given the coming loss of three ships - and at least 1800 service members and their families - and the possible defense cuts."

Ryan said the collection of these trends - vacancy rates, soft demand, pending cuts - could create a challenging scenario for the multifamily market.

"If more major apartment projects are brought online at the same time, there is certainly the possibility of a bubble forming," Ryan said.

Local experts see the apartment market in Hampton Roads from a different angle. Generational shifts of opinions about living quarters, the uncertainty of the housing market and stringent underwriting standards for apartment loans are a few reasons why the local apartment market is still a good bet, according to owners and real estate brokers.

"Gen X and Gen Y favor renting more than buying," said Dan Johnson, first vice president of CBRE | Hampton Roads, who specializes in the sale of apartment communities. "They want to rent because they want the flexibility. They realize that owning a home is not a walk in the park."

A report from the Demand Institute, which tracks consumer behavior, said young people and immigrants will lead the demand for rental properties.

In addition, more than 50 percent of individuals and families who plan to move in the next two years say they intend to rent.

McLean-based Ketter, Washington, D.C.-based real estate investment firm Federal Capital Partners and Norfolk-based Harbor Group International bought a portfolio of apartment properties from Great Atlantic Management Inc. last year, signaling confidence in the market, with rents on the rise, despite a slight uptick in the vacancy rate.

Meanwhile, locally based firms, such as S.L. Nusbaum Realty Co. and The Breeden Co., veteran apartment developers, owners and managers, continue to plan and construct hundreds of apartment units in every municipality in the region.

S.L. Nusbaum, which owns 19,000 units, has 532 units under construction and is planning for another 360 to be under construction soon, while Breeden, which owns 4,200 apartment units, has 750 units under way.

"When you see properties being developed, they are Class A properties," said Tim Faulkner, chief operations officer of The Breeden Co. and president of the firm's property management division.

Of the more than 91,000 apartment units in the region, about 6 percent are less than 5 years old while 84 percent of them are 16 years or older.

"There are customers who want to get a higher-class property," Faulkner said. "You haven't seen that before in this market."

Packed with amenities - such as a pool, fitness room, theater and outdoor grills - these communities, often known as lifestyle communities, command higher rents, many over $1,200 a month.

Faulkner blamed lax underwriting standards for a gross oversupply of homes, which led to the collapse of the housing market, although lenders have tightened standards to the point where potential homebuyers have elected to rent rather than own because of the stricter guidelines.

The criteria are much more stringent for apartment loans, Faulkner said. "At the end of the day, we may have a 25 percent equity stake in the project."

The go-go days of the housing market are legend - "no doc" loans, stated income loans, and little or no down payment on a house.nib