Published on September 20th, 2017 | by UC&D Magazine0
The New American Dream
An almost perfect storm of factors are driving unprecedented growth in Utah’s multi-family housing market – perhaps none more important than a viable mass transit system and Millennial lifestyles.
Over the course of the past decade, Kenny Alldredge is seeing a unique trend unfolding from his on- the-ground vantage point as a construction superintendent, at least in regards to Utah’s commercial multi-family (MF) housing market and Transit-Oriented Developments (TODs): the ‘American Dream’ is changing – for the Millennial generation anyway.
“When we were building (apartments) in 2008-09, they were filling up fast, but not as fast as they are now,” said Alldredge, General Superintendent for Salt Lake-based Wasatch Commercial Builders. “Either there’s a new trend or a new mentality; it isn’t the ‘American Dream’ to own your own home anymore.”
Alldredge’s take on Millennials aside, there has been (and still is) a ridiculous amount of construction activity in the multi-family sector, with dozens of new apartment complexes sprouting up along the 80-mile-long Wasatch Front corridor, many within walking distance of TRAX and FrontRunner lines.
“Growth, growth and more growth seems to be the standard in metro Salt Lake City,” said Bill Knowlton, Director of Acquisitions & General Counsel for Parley’s Partners, a Salt Lake developer which recently completed the third phase of its 378- unit Artesian Springs complex in Murray. “If Utah continues bringing in high-paying jobs in tech and finance-related fields, demand could continue to outpace an annual net absorption of more than 2,000 units.”
“It’s been an unusually robust cycle – it certainly has gone on much longer than I expected,” said Dan Lofgren, a Principal with Salt Lake-based Cowboy Properties, Inc., a prominent MF developer with 18 Utah properties in its portfolio, including 12 in the Salt Lake Valley. “Historic data says 7- to 8-year construction cycles are normal…this cycle has gone on for nine years and there are questions regarding where we’re at in the cycle. In my experience, there isn’t much precedence for a cycle of this duration and you start to second-guess how long it can go on.”
According to a 2017 Multihousing Market Report by Salt Lake-based ARA, A Newmark Company, last year “was truly a year of unprecedented development,” it states, with 14,061 units built in 2016 and planned for 2017. To put that in perspective, 8,000 units in 37 projects were added to the market between 2010 and the end of 2014 (1,600 units per year).
From January 2013 through June 2017, nearly 30,000 building permits were issued for multi-family projects (defined as apartments, condos and duplex/ townhomes) in Utah, according to James Wood, Ivory-Boyer Senior Fellow of the Kem C. Gardner Policy Institute at the University of Utah. Wood can’t remember a time during his 40-plus-year career when MF development in the state was this robust – and it shows little sign of slumping anytime soon.
“It’s definitely a boom market that’s been going on for a few years now,” said Wood. “We’ve had this type of (MF) activity before here, but you have to go
back a number of years. A lot of it is a reflection of housing affordability, but strong demographic and economic growth underlies all of this.”
The ‘M & M’ Factor
An almost ‘perfect storm’ of factors has spurred demand for MF housing locally, including a rising population, strong economic and job growth, and a residential market with low inventories and soaring prices. But the ‘M & M’ factor – Millennials and mass transit – seems to trump all others, and underscores a shift in generational thinking about home ownership and lifestyles in general.
“Millennials aren’t interested in homes – they want to live downtown,”said Guillaume Belgique, President and Founder of Architecture Belgique in Midvale, designer of the trendy 493-unit 4th West Apartments (page 32). “Larger corporations are moving to Utah, which is bringing a housing need…and Salt Lake City is becoming a destination city for a lot of younger people.”
“(Millennials) don’t want to be planted in a home because they’re more transient in nature as they move up the corporate ladder,” added Mark Hampton, Founding Partner of Rimrock Construction of Draper, one of the state’s largest multi-family contractors by volume.
Utah’s average population growth is 1.7% the past three years (1.64% currently, fourth-best in U.S.), and is expected to continue at that level through the end of 2020. According to the U.S. Census Bureau, the state’s population was just north of three million people (3.05 M) as of July 1, 2016, while the World Population Review of Walnut, Calif., projected numbers of 3.25 million by the end of 2020. Utah maintains one of the nation’s top two highest birth rates, boasts the youngest median age (27.1 years), ranks first in current job growth at 4.5%, and has topped Forbes magazine’s list of ‘Best States for Business’ six of the past seven years (the outlier being Virginia in ’13).
Sweet Amenities; High Costs
Prospective MF clientele are also coming in with specific wants and desires. ARA’s report includes a section titled The Amenities Arms Race, which states that today’s renter has “raised expectations as the decision to rent is no longer made by necessity. The quality of a property’s amenities plays a huge role in the clientele and the rents it can generate.”
Carl Tippets, President of Salt Lake- based Pentalon Construction, agreed. “The single biggest change is in the amenity packages,” he said. “We’re building bowling alleys, theater rooms and dog parks, for example. They are really catering to a lifestyle.”
Shared amenities allow for smaller units as well, which is a complementary trend. “Micro-housing is gaining traction,” said Jeff Lonardo, Project Manager and Senior Associate at Method Studio of Salt Lake. “A 350 SF living space can function really well for a single adult. Millennials want amenities more than square footage and the market is responding.”
In addition to rethinking the finished product, developers are opting for projects with different delivery methods.
“One of the biggest trends you’re seeing is less design-bid-builds,” said Tippets. “(Firms) are starting to team up early, and there is collaboration in the pre- construction phase. It leads to a better product and a better process. Developers are becoming savvier. They realize the partnering process delivers the best product and the best pricing by holding to the budget. It puts more accountability and responsibility on the contractor.”
“Experienced developers that are going to win will get their contractor on the team during design phase,” added Hampton.
Skyrocketing construction costs appear to be the one negative in an otherwise rosy market. “Rents aren’t keeping up with construction costs,” said Hampton. “We’re getting pinched because rents aren’t keeping up with inflation. Also, bankers are pulling back from multi-family construction loans so the only thing making it work is low interest rates. If rates start to tick up, you’ll see construction stop.”
“Multi-family is the most cost-sensitive of all market segments,” Tippets added. “It is dealt with in multiples, so when the cost goes up for one unit, it goes up for 300. It is certainly unique in that aspect. Projects are being mothballed right now because of costs.”
MF Hot Spots: Downtown
Salt Lake to Draper
Utah Transit Authority’s completion of its first north-south TRAX line (Downtown Salt Lake to Sandy) in December 1999 opened the door on future TOD projects. Subsequent east-west rail spurs over the next 14 years extended lines to the University of Utah, South Jordan (Daybreak), the Salt Lake Int’l Airport, and Sugar House (the ‘S’ Line) – in addition to the completion of FrontRunner from Ogden to Provo in December 2012.
ARA’s report of Salt Lake County cities with the most new MF deliveries the past five years includes Salt Lake (downtown), Sugar House, South Salt Lake City, and Sandy/Draper. Construction in South Salt Lake City is particularly brisk right now in its ‘downtown’ area from 2100 South to 2700 South and State Street to Main Street, with nine developments featuring 1,000-plus units expected to be completed in the next 18 months, according to Frank Lilly, Deputy
Director/Housing Administrator for South Salt Lake City Community and Economic Development the past six years. He said the first of these projects, the 288-unit Riverfront Apartments, was finished in May, and another 500-600 units are expected to break ground in the next year and be delivered by early 2019.
“It’s something we’ve anticipated since before I started working here,” said Lilly. “Process-wise we’ve been able to handle it. One of the main challenges was along the S-Line…we had to make some upgrades to the sewer and storm drain systems to accommodate this demand.”
Lilly said 1,500-plus units sounds like a huge amount of inventory, but said developers have been extremely optimistic about their ability to fully-lease new complexes.
“We retained a consultant to do market studies, and predicted an absorption rate of 100 units per year,” said Lilly. “We tested that against developer’s predictions – they viewed it as a much grander development potential. Turned out they were right – they sensed a new market that at the time didn’t exist.”
The reality is that developers in multi- family housing will continue to pursue sound investments as long as these economic indicators remain in place.
I have this motto I try and live by, and that is ‘respect the cycle’, said Lofgren. “It’s more of an instinctive thing. From an intellectual standpoint, (market) dynamics are good. I don’t see the ‘iceberg’ – we’re not picking it up on our radar, so we’re continuing to move cautiously forward. We take nothing for granted.”
“Our business decisions are based on our understanding of economic fundamentals and where we see the market going,” added Knowlton. “We continue to be bullish on Utah.”