News Article | 5/20/2007

Builders see turnaround in rental market

On former grazing land more than 15 miles north of downtown Fort Worth, workers on bulldozers are carving out pads for upscale apartment buildings that will soon sprout from the prairie.

The apartments are being built by the real estate arm of the Perot family, which is best known for industrial projects but has never developed multifamily housing on its own.

The company viewed apartments as risky, complicated and low-reward. Now it’s having a change of heart.

“The market is coming back. Rents are up, occupancy is up, and construction costs aren’t so out of control,” says Mike Berry, president of Perot-controlled Hillwood.

From Texas to California and Florida, the humble rental-apartment market is coming back after a slump in the early part of this decade.

Back then, low interest rates and easy financing meant renters could buy homes or condominiums without much increase in their monthly payments. But that changed after several years of rapidly rising home prices and relatively flat or even falling rents.

“Right now, rental housing is extremely cheap compared to for-sale housing,” said Steve Patterson, chief executive of Florida developer ZOM Holding Inc. “The difference can be 40 percent or more,” even after the tax deduction for mortgage interest.

Rentals are also getting a boost from tighter lending standards, which make it harder for people with marginal credit ratings to buy property.

Some developers believe the biggest factor is the weak housing market itself. During hot housing markets, like the early 2000s, young people believed that if they didn’t buy immediately, prices would rise so fast that they could never afford a house or condo. That urgency is gone.

“A lot of them are going into rentals, and they will continue to do that until the for-sale market returns or the psychology of buying becomes positive again,” said Ron Terwilliger, CEO of Trammell Crow Residential, one of the nation’s largest developers of condos and apartments. He’s betting that the for-sale home market won’t pick up until next year.

Apartment developers still face obstacles. Construction materials cost more. Financing is harder because of higher land costs, making banks less likely to get involved. Developers are turning to partnerships with pension funds, insurance companies and real estate investment trusts to finance their projects.

There is also the age-old opposition — especially in suburbs — to apartments, which increase traffic and can cause overcrowding in schools.

Apartment vacancy rates remain high in historical terms. According to the Census Bureau, rental housing vacancies were 10.1 percent in the first quarter of this year, down only three-tenths of a point from their high in 2004.

Developers say much of that is the lingering effect of overbuilding in the 1990s. They say many of the vacancies are in older properties that aren’t appealing to most renters. That’s why they’re building new ones, and often upscale.

“The rental market is very good throughout California,” said Alan Nevin, director of economic research at MarketPointe Realty Advisors in San Diego. “This year, for the first time in many years, there will be a burst of new apartment construction.”

Some of that burst will come from projects that were originally planned as hotels or condominiums. In March, Trammell Crow bought an abandoned condo project in downtown Denver and plans to build about 450 luxury apartments on the land. In San Diego, builder D.R. Horton Inc. recently sold a lot it planned for condos to an apartment developer at a loss of $3 million plus costs.

All of which makes Hillwood — the Fort Worth company led by Ross Perot Jr., son of the former presidential candidate — confident about its decision to jump into the apartment business. The company is building the first of three stages of a 1,000-unit upscale apartment development called Monterra Village.

The property straddles an interstate highway. Hillwood hopes to lure people who work in its 17,000-acre AllianceTexas industrial park — home to more than 140 companies including FedEx Corp., an American Airlines maintenance center, and parts-distribution centers for Ford Motor Co. and General Motors Corp.

Hillwood has controlled the land for years and has developed golf courses and single-family homes in the area. But executives didn’t think there were enough nearby jobs to support apartments until local employers such as Motorola Inc. and Fidelity Investments began hiring aggressively. Now Hillwood plans up to 6,000 units over a period of years.

The company has always worked with partners to develop upscale condominiums and hotels in Dallas. Before going it alone in the apartment business, the firm hired an outside executive to manage the projects.

If they make it in Fort Worth, Hillwood executives say they can take the experience and build apartment projects in other cities.

“Ross sees it as a business he wants to grow,” Berry said.