Upscale builder Toll Brothers Inc. has said
it intends to expand its apartment-development division, a three-year-old
venture that so far has focused on the Boston-to-Washington, D.C., corridor, to
build projects across the U.S. In all, Toll plans to double its equity
investment in the division to up to $300 million. Rival Lennar Corp. in
July said it has recruited sovereign-wealth funds and institutional investors
to create a $1.1 billion fund for building and holding apartments in up to 25
major U.S. markets. Lennar, which will build the fund’s apartments, intends to
expand the fund’s equity to $2 billion within a year, executives said.
The apartment market has been a boon for developers and
investors so far this decade. Vacancies are hovering near 15-year lows at 4.2%,
according to market-research firm Reis Inc., as young adults stay in rentals
longer than earlier generations did. Meanwhile, apartment asking rents have
steadily risen to a 15-year-high of $1,194 a month in 79 U.S. markets in the
second quarter, according to Reis.
The flow of renters into the market has been robust. Despite
a comeback in household formation in recent quarters, the U.S. homeownership
rate declined to 63.4% in the second quarter from 64.7% a year earlier. That
suggests that most new households, as well as a few former homeowners, now are
Another factor boosting rentership: The percentage of people
18 to 34 years of age who are doubled up, meaning they are living with an adult
other than a spouse, increased to 48% this year from 44% in 2007, according to
the Pew Research Center. That suggests many are living with parents, other
relatives or roommates and might soon opt for their own rental.
Such trends have developers racing to build rental
complexes. Charlotte, N.C.-based Crescent Communities LLC has built 5,000
apartment units in the past two years, with another 5,000 in the works for the
next two years. But others caution the cycle might be nearing a peak. Ryan
Severino,a senior economist at Reis, notes that developers in 79 markets built
173,000 apartment units last year, an anticipated 220,000 this year and 190,000
next, whereas the long-term annual average is 120,000. He added that the
average vacancy rate hasn’t changed much in the past two years, which he
interprets as a sign that it is poised to rise.
For both companies, apartments are a side business. Lennar
delivered roughly 21,000 homes in its last fiscal year. Toll, which specializes
in luxury homes, sold nearly 5,400. Both can ease off on apartments when need
be. Toll is scouting several markets, including Seattle, San Francisco, Los
Angeles, Dallas and Denver, for land where it can build apartments in 25% to
75% joint ventures with its partners. Among those with which it has worked on
previous apartment projects: The Pennsylvania State Employee Retirement System,
Prudential Real Estate Investors and Brandywine Realty Trust.
Lennar pledges to focus its fund on building in up to 25
major markets, including Los Angeles, San Francisco and the Miami area. It
plans to build a range of garden, midrise and high-rise projects mostly in
urban settings in those cities. But some will be more suburban, such as
Lennar’s 387-unit, three-story Crest at Park Central complex opening this year
in Dallas with monthly rents ranging from $925 for one bedroom to $1,890 for
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