We continue to have positive views on apartment demand going forward. Occupancy has exceeded 95% for over two years. However, we view 2016 with some trepidation as a surplus of 500 units reaches the market in 2016.
We believe the Omaha Metropolitan Area apartment market is heading towards an over-supply level of 500 apartments. However, this amount is fairly insignificant in light of the pace of job creation, population growth, and the overall amount of units in the market.
Three reasons support this idea.
Supply and Demand Equilibrium Levels
The Omaha metropolitan area has grown beyond a population of 905,000 and has a consistent level of household formation around 4,000 per year. With about 70% of new housing demand typically attracted to homeownership, rental housing stays at rough equilibrium between supply and demand at 1,200 units per year. That number is roughly line with current supply numbers, but there are signs that new apartments have begun to outpace growth.
As a percentage of total housing supply, multifamily units have, in aggregate over the past three years, exceeded the typical homeownership ratio by 2%. There were 3,041 single family permits issued in 2013, 2,639 permits in 2014, and 2,830 for the trailing 12 months ending September 2015. Multifamily housing hit 1,370 units in 2013, 1,533 in 2014 and 1,114 through September 2015. The sum of the three years shows that multifamily has been approximately 32% of new housing. Meanwhile, historical averages for homeownership in the Omaha MSA have hovered at 70%. In this instance, the oversupply of 2% translates in 250 excess apartments.
As an aside, the peak single family construction occurred in 2005, when 5,877 units were permitted.
Units Single Family Multifamily Total % Multifamily
2013 3,041 1,370 4,411 31%
2014 2,639 1,533 4,172 37%
2015 ttm 2,830 1,114 3,944 28%
Total 8,510 4,017 12,527 32%
Job creation and Housing Demand
Apartment demand follows job creation levels in a fairly lock-step pattern. The Omaha employment market has been robust since 2012. Between the 2008 nadir of 437,000 jobs and the recent 2014 figure of 462,500 jobs, Omaha has created over 25,000 jobs. This level far outstrips the supply of housing by more than double. By comparison, the stock of housing increased increased by an astonishing 56,700 between 1999 and 2008, but jobs only grew by 26,200!
Typically market research firms such as Axiometrics use a ratio of 5 jobs per unit as a demand equilibrium ratio. In an ideal equilibrium, the 25,000 jobs created in Omaha since 2008 implies a maximum apartment supply of 5,000 units. In fact, over 6,000 multifamily units have been permitted between 2008 and the end of 2014. This implies a ratio of 4 jobs per unit. If one assumes a job growth rate for 2015 of just over 1%, it can be figured that 5,000 jobs have been added during the past year. The ratio for 2015 is, therefore, slightly better at 4.50.
The ratio of jobs to units at a sub-5 level implies an oversupply of about 750-1000 apartments in the metro area.
So far, we’ve established that an oversupply of between 250 and 1000 apartments exists in the metro Omaha area. While this number is statistically insignificant out of Omaha’s 100,000 rental units, the direct peer group for new construction is much smaller. The peer group for these units really amounts to about 10,700 units built over the past ten years. These apartments have been built at the top end of rental rates. In this case, a 5-10% oversupply is a number that deserves watching.
Why do we say this? The new apartment math requires an annual income of $38,800 per year. This is towards the high range for single person households who have recently entered the workforce. With young people graduating with significant amounts of student debt, the ability to afford rents approaching $2 per square foot per month may be under pressure.
Apartment supply as a percentage of homebuilding implies a 2% level of oversupply – about 250 units. When a job ratio is applied as a benchmark, the oversupply level rises to between 750-1,000 apartments. Our best estimate is that the Omaha MSA is heading towards a 500 apartment surplus in 2016 that will cool the occupancy levels from the peaks enjoyed the past several quarters. Additionally, units being delivered to market must be cautious about the pressure of income levels. While employment growth has been robust, student debt is high and many new jobs are below $35,000 per year.
Are we concerned? Not yet. We believe that many of the areas receiving supply have been absorbed at a rate that has exceeded our own expectations. Meanwhile, some experts believe that the Midtown Omaha area is going to be pushing the limits of absorption by late 2016. Also, while supply may have been running ahead of demand recently, the level of occupancy has been in excess of 96% for a few years now. Anything above 95% implies a very tight market. In this regard, there is proof of continued high demand.
One final caveat: We are not in the camp that there has been a paradigm shift in home-buying attitudes. Millenials will eventually get married and have kids. This process may have been retarded by the recession, but it will continue.
Through September 2015, there have been 667 multifamily housing units permitted in the Omaha-Council Bluffs metropolitan area. This is well below the 2014 level of 1,533.
The equilibrium level which keeps supply and demand in balance is roughly 1,000 to 1,200 units per year.
If you track the previous 12 months and include the last three months of 2014, permits totaled 1,164.
I suspect that 2015 permits will come in at roughly 1,200 as a few projects sneak in at year-end. Despite this fairly moderate number, experienced lenders have expressed concerns of over-supply.
Affordability will be a much bigger issue as rising costs force developers to ask for rents that are pushing the outer limits of income levels.
Recently, lumber prices have started stirring again.
Alchemy Development is one of two developers to submit proposals to the City of Omaha to redevelop a lot at 12th & Cass Streets in Downtown Omaha. The location is prominent for its proximity to the TD Ameritrade Stadium, Centurylink Center, and the burgeoning entertainment district on the north side of downtown. The project features 78 apartments and Alchemy Development is teaming up with the Old Mattress Factory bar and restaurant and Holland Basham Architects.
POSTED: FRIDAY, SEPTEMBER 18, 2015 12:00 AM, UPDATED: 9:36 AM, FRI SEP 18, 2015.
By Cindy Gonzalez / World-Herald staff writer
Apartments with a view toward the home of the College World Series could be in store for a patch of city-owned land once embroiled in controversy.
Two local companies, Alchemy Development and Lanoha Development, have submitted proposals to develop the site at 12th and Cass Streets.
The last structure on the 33,600-square-foot area was a now-dismantled condo showroom and office for the failed WallStreet Tower project. The city had to turn to the courts to regain control of the Cass Street parcel after it sat idle for years as an out-of-town developer’s dream for the tower at 14th and Dodge Streets never got off the ground.
City officials recently put out a request for proposals to develop the 12th and Cass Streets site valued now at $910,000. The candidates are to be interviewed by a committee of various city department heads in early October. The top choice is to be approved by the mayor and City Council. City Attorney Paul Kratz said factors beyond price will be considered when choosing the winner.
Among the city’s objectives, according to public documents, is for the project to encourage a lively, pedestrian-oriented urban neighborhood that expands jobs and residential opportunities.
Both proposals offer residential living as a focus, but they look different and offer contrasting amenities.
Alchemy’s plan is primarily housing, calling for construction of a five-story, L-shaped structure with 78 apartments and indoor parking. A rooftop deck would be carved out of a top-floor space, offering a view of TD Ameritrade Park and the CenturyLink Center.
The $10.8 million project would seek $1.2 million in tax-increment financing and be called Factory 12 — a nod to the Old Mattress Factory restaurant across the street and to 12th Street, said Alchemy’s Bert Hancock. Owners of the Old Mattress Factory are signed on as co-developers. Also involved in Factory 12 are Holland Basham Architects and Dicon Construction.
While the Alchemy project won’t offer retail space, its street level will feature big glass windows through which pedestrians can see fitness and community rooms. “It gives it some liveliness at the ground-floor level,” Hancock said.
Competitor Lanoha proposes a four-story complex with fewer apartments, 45, but with office and retail space as well.
The first floor would contain retail and office bays, a lobby and 50 parking stalls. The second level would be made up of offices and a covered terrace, and the third and fourth floors would contain apartments. Lanoha’s design by Alley Poyner Macchietto Architecture also features a third-floor deck and a community space.
Jason Lanoha of Lanoha Development declined to disclose the project’s price tag. He said his firm chose a mixed-use approach to add around-the-clock action that he said would move north downtown forward. “When office workers are leaving, residents are arriving back home,” Lanoha said.
Hancock said he and his partners were attracted to the growing area of north downtown, even with the challenges associated with the property’s proximity to the Interstate. “We love the idea of being a part of what is happening on the north side of downtown,” Hancock said, citing the nearby CenturyLink Center, TD Ameritrade Park, Creighton University, the Slowdown and future development planned for the Yard parking site. “All of that points toward a direction of making the north side much more exciting, not just for entertainment, but as a place to live,” he said.
Kratz declined to provide any detail on the two plans, calling such details potentially proprietary information and part of an ongoing real estate deal. He said that although the request for proposals process has long been a way that the city sells or develops property, the improved economy and commercial market has led to increased interest in downtown parcels.
You want to follow the herd. It’s natural. Do you remember the 1999 internet bubble? I got so frustrated hearing about my neighbors investing in Level 3 Communications, I thought I was the dumbest person on the block. I bought some Level 3. I made a little money, but I was too chicken to ride it out. I’m glad I didn’t.
Yes, some people escaped that bubble with fortunes intact, but most were swept away. The same can be said of house flippers and land developers in Las Vegas during the middle of the 2000’s. I remember feeling so envious of all these people making quick bucks left and right. What did I do? I went to Baltimore. I flipped a house and lost my ass. Thankfully I got out before the meltdown and I didn’t lose my entire net worth.
So, now, I look at my industry: apartments. Everybody loves apartments as an investment right now. The yield, the safety, the myth that people can’t afford houses anymore. I remember fretting about Omaha surpassing $1.00 per square foot rents in the late 2000’s. We’ve blown through that number.
Downtown is hot. Midtown is hot. But someone is going to be the last one in and they’re going to be late to the party. They will overpay for land, underestimate costs, and underestimate the depth of the market at an affluent level of rent.
It’s frustrating. You know people are making a lot of money right now. But you also have a sick feeling in your gut that everything is being propped up with artificially low interest rates. I went to a conference and heard they are paying 4.82% cap rates in Dallas.
Are we there? Is this Japan with a perpetual zero interest rate policy?
Everybody repeats the same cliche that real estate is about location, location, location. Here’s what they don’t say: real estate is also about price. You can have the best corner in the world, but if you pay too much for it you will dig yourself a hole that will take a generation to extricate yourself from.
We have to take risks as developers. You can’t make money without taking a risk. But you can’t follow the herd. Sheep get slaughtered as the saying goes. Lemmings head blindly over the cliff.
Farnam Street blog has an outstanding transcript of a television interview in India featuring Warren Buffett and Ajit Jain. Everyone needs to read it and watch the interview. It is pure gold.
Ajit: The discipline to say no, if you have that and you’re not willing to let people steamroll you into saying yes. If you have that discipline, that’s more than 50 percent of the battle.
Warren: Don’t do anything in life where, if somebody asks you the reason why you are doing it, the answer is “Everybody else is doing it.” I mean, if you cancel that as a rationale for doing an activity in life, you’ll live a better life whether it’s in the stock market or any place else.
I’ve seen more dumb things, and sometimes even illegal things, justified (rationalized) on the basis of “Everybody else is doing it.” You don’t need to do what everybody else is doing. It’s maddening, during the Internet craze when the bubble was going on.
You have to forget about all those things. You have to do what works, what you understand, and if you don’t understand it and somebody else is doing it, don’t get envious or anything of the sort. Just go on and wait until you find something you understand.”
One of my great frustrations with the World Herald is its lack of context when frequently reporting stories about Omaha that are nothing more than thinly veiled boosterism.
Today, we learned that Omaha’s metro population will hit 1,000,000 by 2023 under reasonable demographic projections. The City surpassed 900,000 this year. With growth around 1% per year – a trend which has continued for many years now – Omaha can reach this pinnacle.
As a real estate developer, this is fair reassurance. 10,000 people per year translated into roughly 2.2 households per year, leads to solid housing demand in the 4,000 to 5,000 annual range.
It’s also a much better program than some metro areas of similar size – areas that are flat or declining: Akron, Dayton, Albuquerque.
But let’s not get the confetti out yet. Look at some more vibrant areas: Des Moines is growing by 10,000 people a year from a base that is only in the 500,000 person range. Denver grows at 45,000 people per year, Minneapolis at 35,000 per year and Kansas City at 15,000 per year. Denver’s rate is double Omaha’s and never abated during the recession.
What do these cities have that Omaha doesn’t?
Minneapolis has a large number of universities that continually replenish the youth culture. Denver has beautiful mountains and lots of sunshine. These are convenient answers. A look below the demographic hood reveals a City of Omaha that is seriously lacking a diverse population, particularly in the arenas of business and political leadership.
Dynamic urban regions need smart people, plenty of capital, and the creativity and ingenuity that is fueled by a population that is diverse.
I was at a business function yesterday morning with some of the City’s top professionals. Women made up less than 20% of the audience and I don’t think I saw more than one or two people of color.
Skilled and entrepreneurial young minorities want to move to places like Atlanta, Washigton DC, LA and Chicago – cities that have emerged from checkered racial histories to become cultural melting pots that offer more political and business opportunities for people of color.
Perhaps Omaha can make this leap. There are some encouraging signs:
Omaha’s election of Jean Stothert as mayor and Deb Fischer as Senator is a major leap forward. Omaha cast an electoral vote for Barack Obama in 2008, so there’s hope for greater minority representation. Even gay folks find Council Bluffs more hospitable with Iowa’s permission of same sex marriage.
But until Omaha empowers more minority businesses and political leaders, the city risks being a place where creativity is stifled by an echo-chamber of white guys in blue blazers, khaki pants, and oxford shirts who continue to be the power brokers. Omaha’s population growth can’t accelerate without diversity.
February 2015 – A little relief for apartment builders? With costs up over 30% from 2011-2014, there appears to be some easing of cost pressures.
Source: Random Lengths