Multi-Family Housing Report - July 2010

By Jessica Chevalier

When the single-family builder market fell off, some anticipated that the multi-family market would remain an area of health for builders and installers. And for a while it was. In fact, the multi-family market held its own until August 2008. But when jobless rates elevated, the sector was impacted significantly.

At present, vacancy is at a 25 year high, and many property managers are choosing to extend the life of existing flooring through cleaning or repair rather than opting for replacement. However, the industry reports that this season’s numbers are showing increases over 2009’s, and a significant recovery for the multi-family market, and those flooring manufacturers, retailers and contractors that service it, is expected by summer 2011.

Multi-family housing includes apartment complexes with five or more units, senior living, and military duplexes, quads and barracks and provides lodging for 44% of all U.S. households. Multi-family housing is exclusively rental property. Purchased condos or townhomes are not considered a part of the multi-family market; neither are vacation rentals. Most multi-family housing units are corporate-owned and run by property managers. Big cities like New York, Boston, Los Angeles and San Francisco have the largest renter markets. In each of these cities, over 60% of total housing units are occupied by renters.

According to the U.S. Census Bureau, the vacancy rate for rentals was 10.6% in the first quarter of 2010 or 3,899,210 empty units. This number is 0.5% higher than the year-over-year rate of 10.1%. Vacancy rates for rentals dropped below 10.0% briefly in the third quarter of 2009 to 9.9%, but they have not dipped lower than 9.5% since the third quarter of 2003. With an 11.3% vacancy rate, the cities suffered more intensely than the suburbs (9.8%) in the first quarter of 2010. Those cities that were overbuilt before the downturn—such as Dallas, Phoenix and Las Vegas—suffered some of the highest vacancy rates.

Though the single family market has suffered severely as a result of bad mortgages and inflated home values, the multi-family segment has been significantly impacted by a weak job market. In the pre-recession days, some lenders were offering high and adjustable interest rate mortgages to individuals who would previously have been unable to obtain a mortgage. This, of course, took a chunk of individuals out of rental properties. Furthermore, vacancy rates have been impacted by what the industry calls the “shadow market.” Many homes that have been foreclosed upon can be picked up by new buyers for a fraction of what they would have sold for in a solid economy. Therefore, some individuals who would have been renters in a good economy now have the ability to buy, further pushing the multi-family market into a tailspin.

However, in mid June, the National Association of Home Builders released its Multifamily Market Index (MMI) findings, which reported signs that the multi-family market is moving towards stability. The MMI measures builder sentiment regarding occupancy and production, and it showed that demand for class A apartments—the most expensive properties and the class hardest hit by the recession—increased. Demand for class B apartments rose as well. Class C apartments—usually in the highest demand in difficult times because they are the least expensive—showed a slight decline.

In addition, The Wall Street Journal recently noted that renting a home may be the smart choice for many in the current economy, as it allows individuals the flexibility to easily and quickly relocate in a competitive job market. Whereas a renter can simply walk away from a property for little more than the penalty of a broken lease, homeowners must sell their current residence before relocating—at times a costly and time-consuming endeavor. In fact, the Journal’s Richard Florida reports that, “… cities with high levels of homeownership—in the range of 75% like Pittsburgh and St. Louis—had, on average, significantly lower levels of economic activity and substantially lower wages and incomes.” Whereas previous generations viewed homeownership as a staple of adulthood, today, many professionals need greater flexibility to meet the demands of mobility within the workplace.

Apartment living makes up the majority of the multi-family market, accounting for 75% of all rental property. According to the National Multi Housing Council, 31% of apartment dwellers are under the age of 30 and have a mean income of $35,308. Approximately 49% of all apartment households have only one member. In 2009, asking rents for apartments fell by 2.3%, the greatest drop in 30 years, according to Reuters.

In the recession, one-bedroom apartments have been hit most severely. Whereas families may opt for a two or three bedroom apartment instead of a single-family residence to save money in a downturn, singles, who commonly reside in one-bedroom apartments, often move in with family or friends, rather than forking over rent in an unpredictable or stale job market. In fact, job growth is the single biggest indicator for regaining a healthy multi-family housing market. As landing a career job becomes an increasingly more difficult prospect for new college graduates, the option of moving back in with parents is all the more attractive—and necessary.

Seventy-five percent of the multi-family flooring market’s volume of business takes place between May 15 and September 15. Students account for a lot of this. As they complete their semester studies and move out of their apartments, property managers uplift and re-lay flooring in preparation for fall’s new round of tenants. Summer break also provides parents of younger children with the opportunity to move without disrupting their child’s studies, and many of these families opt for apartment living until they get to know an area and determine where they would most like to buy.

Jerry Hosko, president of Redi Carpet, one of the largest multi-family market dealers with locations in Texas, Colorado, Arizona, Florida and Virginia, notes that multi-family flooring suppliers, like his company, “live off of movement.” He explains, “With a lack of jobs, people are sitting tight and are apprehensive about making a move to another part of the country or to a job that they’re not so sure about.”

MULTI-FAMILY FLOORING
However, with the summer months upon us, Graham Howerton of the FEI Group, an organization composed of flooring retailers within the multi- and single-family markets, expects to see increased activity in some areas of the country, particularly those markets that entered the recession sooner and are, therefore, recovering sooner. Parts of Florida, Chicago, Washington D.C., the Carolinas and central Pennsylvania are showing an uptick in large scale renovation. Portland, St. Louis and Salt Lake City are seeing movement as well. Howerton reports that while the numbers are significantly down from what they were pre-recession, there is growth over summer 2009’s showing.

Kimberly Rooney and her husband Christian own Flooring Depot, which has two locations in the New Orleans metropolitan area, and has roughly 55% of its business in the multi-family market. In New Orleans, vacancy rates are still high at 13%, as a result of both the economy and Hurricane Katrina’s lingering impact on the area. Within this market, Rooney notes that there are many units that do need flooring replaced. However, if a property manager has ten empty units, five in need of new flooring and five with flooring that is passable, they will certainly choose to rent the passable units first and hold off on replacement as long as possible. The good news? When demand for rentals does increase, there will be a glut of properties in need of new flooring.

The multi-family tax credit market, which includes Section 8 and Section 42 housing, has remained relatively steady throughout the downturn, as it is subsidized by government funds. Chris Ochtera, general manager of Hamernick’s Decorating Center of St. Paul, Minnesota, has a significant portion of its work in the tax credit market and notes that tax credit jobs have significantly better margins than market rate properties—by as much as 10%. In fact, Hamernick’s has shown growth amid the downturn; the Minnesota market, however, has not been hit as severely as many areas of the country.

Even within growth markets, FEI’s Howerton has seen a downward shift in the price points on floorcovering products chosen by property managers. Rather than the standard 25 ounce nylon, many property managers are now moving towards an 18 or 20 ounce nylon with lower twist levels. Some are choosing PET or triexta fiber over nylon. Partial replacement is a trend as well. As budgets have dropped, managers have opted to replace only those areas that receive heavy traffic and, therefore, show the most wear, like living rooms and hallways. Bedroom carpet is often just cleaned.

For hard surfaces, felt-backed sheet vinyl still dominates, though loose lay sheet goods or luxury vinyl plank is seeing an increase in the multi-family market. Though loose lay vinyl can be more expensive per foot, it has lower associated floor preparation cost than sheet vinyl, which makes it about equivalent price-wise, ultimately. In addition, in the event that a loose lay vinyl floor suffers moisture damage, it can be pulled up then put back down after its underlayment has been repaired. Damaged planks can be replaced individually.

The wood looks available in loose lay are a boon as well. As Hosko says, “The wood look is always in.” And many tenants are willing to pay more rent for a unit that they see as an upgrade—a good deal for the property manager who has the same installed cost for sheet or loose lay. Many property managers are now choosing to use vinyl in place of carpet in hallways, living rooms and great rooms. Though vinyl costs slightly more than multi-familty carpet initially, it resists staining and has a longer life than multi-family carpet’s three- to five-year anticipated span.

Rooney reports that buying attitudes have shifted significantly due to the recession. Whereas lifespan was a common consideration in the past, many property managers are no longer interested in investing in better wearing—and therefore most costly—products, as they simply do not have the extra money to spend. Getting something on the floor so that a property can be rented as soon as possible is the highest priority, and long-term considerations have been relegated to the back burner. Some larger corporations still have interests in investing in better products, but only if it can be proven that they will outperform base grade products. Blane Haywood of Shaw Industries notes that a property manager will often install new flooring, a small investment in the grand scheme of things, to help a property stand out in a crowded market.

For flooring contractors, margins have fallen significantly in the recession. Desperate competitors from within the segment, as well as contractors from other segments seeking jobs in a down economy, underbid work—doing cash jobs just to stay afloat. At the same time, property management companies are taking longer to pay. As of yet, the market hasn’t seen too many companies go out of business, though a few have. However, when a strong upturn begins, those contractors that have exhausted their credit lines and used up their cash flow will find themselves in a hard place, and the market will likely see competition pared down.

Credit plays an important role in renting multi-family units as well. During the downturn, many property managers have been burned by renters breaking contract agreements and vacating apartments. Therefore, they rely more heavily on credit checks to determine whether to rent an apartment to an interested party. Those prospective renters whose credit has taken a hit as a result of recession pains will likely find it harder than ever to locate a landlord willing to take a gamble on them. After all, an apartment vacated mid-lease still requires cleaning, repair of damages, repainting, floor cleaning or replacement, and payment of unpaid utilities.

The first time home buyer tax credit of $8000, which started April 8, 2008 and was just extended until September 30, 2010, isn’t helping the rental market either. As of late April, 1.8 million families took advantage of the incentive and traded in their rent for a mortgage. That number accounts for just less than half the number of vacancies in the first quarter of 2010. While the tax credit may be helping the U.S. economy get back on its feet, it is not helping the rental market gain traction to dig out of its hole.

As a result of many of these elements, the market may see an influx of multi-family housing units in foreclosure in the coming months. Most likely, these units will be snapped up by large rental corporations who have the capital to invest in renovations. Of course, these renovations will likely include flooring, which is good news for retailers and contractors.

In spite of all the hardship that the multi-family flooring industry is experiencing at present, Rooney notes that there are upsides to learning to be lean. “The economic times are forcing us to be better: to manage staff and inventory more efficiently. Being lean and efficient will yield strong profitability when things turn.” In addition, Flooring Depot notes that the recession is causing them to work more closely with clients, helping them find affordable options and meet their budgets—creating bonds that will last beyond the downturn and will hopefully translate to years of fruitful business.

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