Weeks of Added Home Sales, After a Plunge, Draws Multifamily Industry Attention
After years of booming apartment demand in urban centers, early data has some analysts wondering if some renters may be having second thoughts about the value proposition of their small, pricey dwellings during a pandemic that’s made more roomy single-family homes more attractive.
At the beginning of the coronavirus pandemic, sales of new homes plummeted as commercial real estate markets around the globe felt the brunt of economic uncertainty amid the crisis. In early April, U.S. homebuilders reported steep declines in their average weekly home sales as the economy experienced some of its lowest performance figures in history.
Then, things changed.
Over the past three weeks, U.S. homebuilders reported steady increases in their weekly new home sales, according to data provided to CoStar News by John Burns Real Estate Consulting, an Irvine, California-based research firm that tracks more than 115 production builders active in 46 U.S. metropolitan areas.
While only a three-week trend at this point, the third week’s results are still preliminary and the precise number isn’t out yet, the steadily rising sales could also be reflecting bargain hunting, particularly during the normally busy spring buying market and as interest rates have fallen. But analysts say it also may show the first signs of potential changes to a years-long trend of consumers flocking toward the center of dense metropolitan areas, renting smaller and thinking of their apartment as a place to sleep when they’re not enjoying city amenities.
In a time where a home has become, well, everything — the place they work, cook, eat, entertain themselves and spend the vast majority of their day — roomier single-family homes and backyards may be looking more alluring.
“I think we’re going to see these dramatic shifts across our society,” Stephen Basham, managing analyst at CoStar who tracks Los Angeles, said in a phone interview about the coronavirus pandemic and its effects on housing.
Long before the coronavirus pandemic, multifamily developers have targeted the urban centers of cities. Between 2011 and 2015, apartment construction in the urban cores of the 20 largest U.S. cities was up 224%, compared to 146% in the suburbs, according to a study from Buildium, a property management company. The selling point on urban core apartments has been an intuitive one: In exchange for pricier-than-the-suburbs rent, residents can be within walking distance of their work, the city’s trendiest restaurants and a slew of nightlife and entertainment spots.
While the demand for housing in dense city centers near job hubs isn’t expected to plummet, increasing interest in the outskirts of the cities could be climbing as the effects of the pandemic drag on and more people prepare to work from home for longer stretches. Many large national firms including tech giants Facebook and Google as well as brokerage Avison Young have told workers they’ll be able to work from home for at least the rest of the year. Social media platform Twitter has told its employees they can work from home permanently if they chose.
A survey of 900 people from large cities nationwide conducted by real estate data company and brokerage Redfin found that more than half of the respondents would move if the current work-from-home conditions remain permanent. Some of those workers may move to the suburbs, while others may opt to simply leave the city for a smaller, cheaper alternative nearby, according to the survey.
Redfin data also shows that during the seven-day period ending May 8, single-family home sales were closing at the same pace they were this time last year, another indicator that the suburban housing market could benefit from conditions brought on by the pandemic.
“Redfin is preparing for a seismic demographic shift toward smaller cities,” Redfin CEO Glenn Kelman in a post about the survey on the company’s website. “Prior to this pandemic, the housing affordability crisis was already driving people from large cities to small. Now, more permissive policies around remote work, and a rising wariness about close quarters, will likely accelerate that trend.”
Demand for new home construction is being especially driven by young renters secure in their employment statuses, Devyn Bachman, research manager at John Burns Real Estate Consulting, told CoStar News.
Moving Out
Apartment rental listing website Apartments.com said rental searches have been growing in the past few weeks, which CoStar analysts suspect is driven by people looking for space for a home office or free from roomates who can grow annoying when everyone’s stuck in the apartment together. But John Affleck, CoStar’s vice president of market analytics, said workers may seek more spacious homes in the more affordable suburbs as time goes on and office commutes are no longer a part of the immediate decision-making process.
Lennar Corp., one of the largest U.S. homebuilders, found that new home sales in the first two weeks of the second quarter exceeded the company’s expectations, according to Stuart Miller, executive chairman of Lennar, in the most recent earnings report. The company, based in Miami, reported 10,321 new home completions in the first quarter of 2020, according to its most recent earnings report.
The U.S. Census Bureau reported that 186,000 new home sales in the first quarter, matching the highest quarterly total since 2007.
Still, not all builders are experiencing growing demand after the pandemic brought the new and previously owned single family housing market to halt when it spread across the United States in March. Arlington-based D.R. Horton, the nation’s largest homebuilder, has reported no such increase in home sales thus far. In April, the company’s net home sales are 11% lower than they were in April 2019, according to the company’s most recent earnings report.
But new home buying activity generally has started to pick up again, slightly.
Data from John Burns Real Estate Consulting shows a 15% decline year-over-year in weekly home sales in the week starting March 15th. By the week beginning on April 5th, weekly sales had declined roughly 85%. The following week, though, homebuilders reported a 20% increase in new home sales.
The John Burns data shows that while home sales are still significantly down from their 2019 levels, sales figures are recovering relatively quickly, considering the sheer volume of economic uncertainties introduced by the coronavirus pandemic.
“There are definitely things you could theorize,” CoStar’s Basham said in a phone interview. “Think about the popularity of the micro unit or the studio apartment. They’ve become so popular because, especially, in a big city … there are plenty of renters who view their apartment as” a place to sleep.
“That calculus changes dramatically when you’re locked in your apartment for six weeks and can’t go anywhere,” Basham said.
Employment Demand
Apartment developers in major cities say they aren’t worried about losing demand. In fact, some are having the opposite problem, especially in housing-starved metropolitan areas such as Los Angeles.
Sean Burton, CEO of the Los Angeles-based multifamily investment and development firm Cityview, said he hasn’t seen this trend affect his portfolio. Cityview has more than $2 billion in multifamily assets under management and has either developed or acquired more than 100 properties in major and emerging West Coast markets.
A bigger driver than the coronavirus will be long-term employment trends, Burton said. People will always want to live near their work; simply put, there is a higher density of employers in urban locations than in the suburbs, so one can infer that there will consistently be a high density of those companies’ employees living downtown, too.
“What [companies] need are talented, trained employees, so they have to be where the people are, and the people haven’t been in the suburbs — they’ve been in the more urban locations,” Burton said in an interview.
Across its portfolio, Cityview’s retention rates , a measurement of tenants who renew their leases, is actually up 20% amid the crisis, Burton said.
“We’ve been leasing at a pretty fast clip — almost as fast as we were beforehand,” Burton said.
In recent years, renters in San Francisco, a very expensive and dense apartment market, have turned to coliving or micro units as a way to cut down on costs. Compared to a studio unit in the same neighborhood, micro units, which typically span 350 square feet or less, rent for 20% to 30% lower and often come furnished or have built-in storage systems, according to a recent Zumper study.
In an interview with CoStar News, Olivia Duran, a recruiter for Slack Technologies and a tenant in one of San Francisco’s micro apartments, spoke of working from home at a standing desk she’d set up in her walk-in closet and struggling to do much in an apartment largely consumed by her king-size bed.
“It feels a little like being a rat in a science experiment,” Duran said.
Amid a time of economic uncertainty, cheaper living options in suburbs have their appeal. And especially in the midst of a pandemic, when people are urged to stay at least 6 feet apart, leaving a city’s dense urban core may feel like a matter of personal safety.
As businesses decide to reopen offices again, executives may find new arrangements to accommodate a workforce outside an urban core, hypothetically creating more office demand in the suburbs.
“At the end of the day, the only thing we can say with 100% certainty is that this is causing massive disruptions to our society and economy, and will probably permanently change the way many of us live and interact with our communities,” Basham said. “This could be a reflection of larger societal changes the [pandemic] forces us to undergo.”
By: Cara Smith-Tena, CoStar News; 5/15/20
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