he American dream has long been intertwined with
visions of homeownership. But things have shifted. For
many of the younger members of the U.S. workforce,
the American dream is now a downtown view with a
short walk to the office, gym, restaurants and nightlife.
Millennials began flocking to cities to chase work
during the Great Recession. So, developers responded
with lifestyle assets flush with amenities in urban neighborhoods. This positive feedback loop resulted in more
companies realizing that cities were attracting their
Amazon’s recent decision to split its second headquarters between Long Island City in Queens, New
York, and Crystal City, Virginia, outside of Washington,
D.C., is just the latest demonstration of the power of growing metroplexes. The growth
of cities — and their apartment markets — is not based on sentiments alone, however.
A rise in renters
Economic factors such as student-loan debt, a lack of entry-level single-family
homes and rising interest rates have stifled homeownership. College graduates in
the Class of 2018, for example, walked off the stage with a diploma and an average
of $39,400 in student-loan debt.
If the headline of a recent Trulia research piece, “The American Starter Home:
Expensive, Small, Broken Down, and Hard to Find,” doesn’t make the case clearly
enough, the data points certainly do. From 2012 to 2018, the inventory of starter
homes declined 49 percent while prices rose 58 percent. There also is the fact
that we are in the midst of a rising interest rate environment, with the average
30-year, fixed-rate mortgage increasing by about 90 basis points from November
2017 to November 2018.
Demographic factors like delayed parenthood mean that traditional triggers for
home-purchase decisions are occurring later in life. On average, women are having
their first child at age 28, compared to as recently as 2014 when 26 was the aver-age, according to the Centers for Disease Control and Prevention. Furthermore,
the fertility rate — the number of births a woman is expected to have during her
childbearing years — has declined to an all-time low of 1.76.
This decrease is weighted toward cities, with fertility rates dropping 18 percent
in large metro areas, 16 percent in small and midsize cities, and 12 percent in
rural areas from 2007 to 2017. Smaller households mean that new parents might be
comfortable in a two- or three-bedroom apartment for the long term, rather than
fleeing to the suburbs for more bedrooms and a yard.
When we combine all these factors, it’s easy to see why many think a mid- 60
percent homeownership rate — 64. 4 percent as of third-quarter 2018 — is the
new normal. It could actually be a return to normal, since a mid- 60 percent home-
ownership rate was standard from the mid-1960s to mid-1990s.
Competitive small cities
Untethered by homeownership, a younger professional workforce is converging on
cities and is generally staying longer. This phenomenon is not limited to gateway
cities or primary markets. Secondary and tertiary cities are expanding as well.
Commercial mortgage brokers should refer to the chart accompanying this article
that features select Southeast U.S. cities that lenders are closely watching to ensure that their maturing multifamily markets are well capitalized. These cities are
ranked by percentage changes in population from 2010 to 2017. Note that with
the exception of Charlotte, North Carolina; Jacksonville, Florida; and Atlanta, many
would be classified as “small cities.” Each market has its own unique growth story.
Charleston, South Carolina, for example, continues to grow as a tourist
destination and has seen recent investments from Volvo and Mercedes-Benz.
In Greenville, South Carolina, companies like BMW, Michelin and Fuji have created a manufacturing hub at the midpoint between Charlotte and Atlanta — two
of the fastest-growing cities in the country. As a result, downtown Greenville is
booming with mixed-use developments and some residents are commuting out
of the city for work so they can take advantage of the draw of city life.
Moving south, Toyota and Mazda last year announced a $1.6 billion plant in
Huntsville, Alabama, a move that should add roughly 4,000 jobs. Further toward
the Gulf of Mexico, places like Gulfport, Mississippi, continue to bounce back from
Hurricane Katrina and the Great Recession.
With a federal mandate to create 1,300 jobs by 2021 in exchange for $570 million
in grants from the U.S. Department of Housing and Urban Development, the Port
of Gulfport recently secured a significant win. A new compressed gas liquid (CGL)
production and export terminal operated by SeaOne Holdings is set to bring hundreds
of jobs to the area.
Multifamily owners and operators are welcoming renters in all locations.
For lenders, however, running a portfolio in a smaller city comes with its own
set of challenges. Take Murfreesboro, Tennessee, as an example. Located
about 35 miles southeast of Nashville, Murfreesboro is one of the fastest-growing
cities in the country.
After permitted multifamily developments increased from 445 units in 2016 to
1,233 in 2017, a concerned city council adopted a moratorium to limit apartment
construction to certain areas and cap new developments at 100 units. Although
cities of all sizes face these growth restrictions, multifamily owners and investors
— and the mortgage brokers representing them — face unique challenges when
providing financing in some of these smaller, yet growing, cities.
Financing that fits
Although the economic and demographic factors cited above certainly present a
strong case for multifamily investors who are looking to expand into a new market,
these smaller metro areas can be capital-constrained when compared to larger
cities. A national bank or lending institution, for instance, may not be familiar with
the robust higher-education and health care market dynamics in a place like
Tuscaloosa, Alabama. A community bank may be willing to look at a deal, but only
if there is an existing relationship with the potential borrower.
T<< Smaller Cities continued from Page 33
Continued on Page 36 >>
Brandon Pate is a vice president in the Birmingham, Alabama, office of Hunt Real Estate Capital. He is primarily
involved in the origination and transaction management of multifamily, mobile-home community and commercial
real estate debt financing. Prior to joining Hunt, he worked at Beech Street Capital. Since beginning his career in
2012, Pate has managed and closed more than $1.5 billion in multifamily and mobile-home park transactions.
Reach Pate at (205) 314-4841 or firstname.lastname@example.org.
CITY 2017 POPULATION* CHANGE FROM 2010
Murfreesboro, Tennessee 136,372 25.4%
Cary, North Carolina 165,904 22.7%
Cape Coral, Florida 183,365 18.8%
Charlotte, North Carolina 859,035 17.4%
Greenville, South Carolina 68,219 16.8%
Atlanta, Georgia 486,290 15.8%
Clarksville, Tennessee 153,205 15.3%
Charleston, South Carolina 134,875 12.3%
Tuscaloosa, Alabama 100,287 10.9%
Jacksonville, Florida 892,062 8.6%
Huntsville, Alabama 194,585 8.0%
Lexington, Kentucky 318,449 7.7%
Gulfport, Mississippi 71,822 5.9%
Biloxi, Mississippi 45,908 4.2%
Birmingham, Alabama 210,710 -0.7%
*Population estimate (Source: U.S. Census Bureau)