Will 2011 be heaven for the multifamily sector?

Demand for rentals is booming but taxes are going up too. The real estate industry is buzzing with the news - 2011 will be a haven for the multifamily sector. All this is due to a few factors. First, a drop in new construction projects in 2009-10 will result in a shortage of rental apartments in 2011. Second, baby boomers will considerably affect market with their tendency to migrate after retirement. Third, the single-family market remains ambiguous, and people will not give up their rentals. But will all that be enough to make it a good year? People may not expect it, but without a doubt rents this year will grow as fast as mushrooms after a rain shower. A deficit of new construction projects will lead to higher demand for apartments and therefore likely higher rents. In addition we have to think of the vast amount of probable renters that are coming from foreclosed homes, and those who have lost a job or taken a new one at a lower salary. If you live in NYC you are most likely to be the first one to feel it in your pocket, people have always come here in search of work opportunities. It is, however, too early to say how much or when rents will increase. But apartment vacancies began dropping in 2010 where from sky-scraping 8% of vacancies it went down to 6.6%. Following this movement, months of renter incentives that were popular since the start of the recession, such as free rent, disappeared promptly. Rentals are always tied to economic and demographic factors. Accordingly, this year and many others to come will be strongly affected by our demographic trends. And I am talking here about the composition of our population: age, race, gender, income, migration patterns and population growth. These statistics are often significant aspects that affect how real estate is priced and what types of properties are in demand. And the trend will soon be dictated by baby boomers, and this shift in demographics can greatly impact the market. Baby boomers, people who were born between 1945 and 1964, are likely to have an influence on the real estate market, because of their large population. Their retirement began in 2010 when the first baby boomers turned 65, and will continue for almost two decades up to 2029. Some aging boomers may migrate to warmer places leaving their apartments and homes available for rent. But what will be the impact exactly yet hard to foresee or measure. The single-family market remains unpromising, which feeds the rentals. As survey by Fannie Mae reported - the number of Americans who believe that buying a home is a safe investment is still falling. Now, only 64% of applicants said they believe a home is a safe investment, comparing to 70% in 2010 and 83% in 2003. The same survey says that more Americans say it's a bad time to sell a house, and fewer Americans say it's a good time to buy. The picture is gloomy - nothing is predicting a recovering of the housing market. These factors are indeed exciting for the multifamily business, but there is one factor that will challenge that happiness. And that would be - property taxes. And if that will not change, development on new constructions will drop again. And the reality is that for some buildings almost one-third of the revenues are going straight to pay the tax bill. Even with the growing income from higher rents, the tax expenditure is getting larger, faster. This affects building owners that have 20% of their apartments positioned for low-income families, and that would be people who have their properties built in the past two decades. A tax spike will definitely impede the future growth of 80/20 type of buildings. Property owners have two options to choose: first, to deregulate low-income units, or second - "become" condominiums. Commercial property owners are being frustrated with an unfair taxation of their properties compared to single-family property holders who seem to be privileged by stable lower bills. And their anger should not be a surprise, with the latest assessments rolls for Manhattan rentals showing the increase of 8.5%, while one, two, and three-family homes increased by 5.7%. The issue becomes even worse because owners are losing their 20 years tax abatements, and will be required to pay taxes in full. As for now, if the city will continue to evaluate rental properties as high, and tax bills will come up to soaring numbers, it will prevent a necessary growth of new apartment buildings in New York. So will multifamily market be in heaven or not, depends to a great extent on Bloomberg and Cuomo and what their tax policies will be. Moses Sioni is a managing director at Sioni & Partners, New York, N.Y.