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Multifamily Housing is Booming, and It Doesn't Look Like a Bubble

Here is a link to a post from the CFA Institute Enterprising Investor Blog: Multifamily Housing is Booming, and It Doesn’t Look Like a Bubble.

The CFA Institute Enterprising Investor Blog is a forum for delivering practical analysis of current issues in finance and investing. Below are some of my comments with the Boise market in mind and some of the graphs and images included in this blog post.

Let's start with the title, "Multifamily Housing is Booming, and It Doesn't Look Like a Bubble." We really saw values increase in 2013, but 2014 has been what I would call very stable. But the number of multifamily developments already built, under construction now, and on the schedule for future development is certainly a boom. Is that a bubble? I think so. But I think the real concern is will that bubble burst? I don't follow the big apartment developments all that much, but what I have seen is that they boast huge rents to support their very high price tags. For now, there seems to be plenty of people willing to pay the higher rent. But if we build too much, we'll have occupancy issues, which typically cause rents to lower. Lower rents decrease value.

Below are two graphs included in the blog showing single-family and multifamily starts (in thousands).

Single-Family Housing Starts (In Thousands)

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Single-Family Housing Starts (In Thousands)

Multifamily Housing Starts (In Thousands)

Click to enlarge
Multifamily Housing Starts (In Thousands)

I always enjoy seeing others reference similar milestones that I have previously mentioned within my own blogs. Here the author references President Clinton's desires to improve Homeownership. I've referenced that as the American Dream. And I don't think we can totally blame that administration, as that Dream continued on as we created hundreds if not thousands of different loan programs. The results ended up being the American Nightmare. As I have said before: owning isn't for everyone and that by no means is a slam. There are plenty of very good reasons to rent and they can make the best financial sense. But back to their point. Below is a graph showing how the homeownership rate has decreased.

Homeownership Rate

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Homeownership Rate

Then we get to where national numbers and my Boise-area experience differ. Unlike the rest of the country, our rents and occupancy didn't peak in 2008. After the crash, we ended up with a ton of single-family homes that either were not selling or not selling for a price the owner was willing to accept. So those homes became rentals. We had a huge supply and it took awhile to get them all rented up. But it certainly was a turning point where we started seeing the demand to rent, and as inventory levels were absorbed, the rental market strengthened. They discuss a 7.5% vacancy rate where here in the Boise area we're half that rate.

Below they showed the average rental rate for multifamily properties. Although the dollar numbers are lower in the Boise area, our graph is climbing similarly.

Average Rental Rate of Multifamily Properties

Click to enlarge
Average Rental Rate of Multifamily Properties

Overall Implications

Within their post, they list a number of well-made points. I've always considered myself a conservative skeptic. Considering the number of rentals I myself have invested in, there are a lot of people that look at me and wonder how I could ever call myself conservative or a skeptic. Well, I have my comfort level and that comfort level has probably kept me from taking more risk and creating huge wealth. Or perhaps, it's what saved my bacon through the crash. So back to being the conservative skeptic. Here in Boise, I think we are building too much too fast at prices that require rents that may not be sustainable or allow room for growth. If the numbers work well using conservative rents and higher vacancy, then it probably would make more sense. Remember all of those investors who bought because values just kept going up and up? Same thing here in my opinion. If the project only makes sense if rents keep going up and up and vacancy has to continue to be records lows, I personally think it's gonna hurt. But in the meantime, it's putting a ton of people to work and sales profits are giving lots of people money to spend and put back into the economy.

Tony Drost, President, First Rate Property Management

Tony Drost
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