Becoming a homeowner used to be a major facet of achieving the American dream—but in recent years, it seems that American dream has shifted. From millennials to baby boomers, people are moving past the ideal of buying a home with a large yard in the suburbs to instead renting a more modern, amenity-filled apartment in a bustling area of the state.

Multi-family apartment buildings are being constructed alarmingly fast all along the Wasatch Front. Mark Jensen, senior vice president of investment sales at Newmark Grubb ACRES (NGA), says multi-family housing in Utah is extremely robust right now due to factors such as interest from out-of-state investors, the state’s capital preservation market and booming population growth.

Although these trends seem to show a need for more multi-family housing developments, is there a chance that developers are building too much, too fast? Or are there enough people demanding this new lifestyle that it just makes sense to strike while the iron is hot?

A multi-family bubble?

Dan Lofgren, president and CEO of Salt Lake City-based multi-family housing developer Cowboy Partners, says while some may believe the Wasatch Front is in the middle of a multi-family housing bubble, he’s not inclined to employ that term.

“The term bubble means the market is growing fast only to burst,” he says. “Instead, I say that we are just always somewhere on the [market] cycle. Are we closer to a downturn today than we were a year ago? Absolutely, because that’s how cycles work. Does that mean we’re immediately in peril? No.”

The cycle Utah is in now is unusually strong and robust, Lofgren says, which can be attributed to the state’s extraordinary job growth. But the fact that it’s prolonged doesn’t mean the market is on the edge of a cliff.

“I’m quick to caution anyone in the industry to be respectful of the cycle and bear it in mind, because the market will eventually move in a different direction,” he says. “But we’re still looking at selective new development in the market here. Our cautiousness about the cycle hasn’t caused us to withdraw, but we are aware of the cycle and we’re watching to see what happens. We’re much more selective today than we might have been four or five years ago.”

Construction pipeline

During the last five years, Salt Lake County has averaged approximately 1,600 new units added to multi-housing inventory. Greg Ratliff, vice president of the apartment properties group at NGA, says all Salt Lake County submarkets are experiencing record development that far surpasses that average.

Sandy leads all submarkets with approximately 2,023 units under construction—of which 79 percent are Class-A properties largely located along the State Street Corridor and City Center—while downtown Salt Lake City presently has a total of 1,851 units under construction at nine locations, with the vast majority (1,509 units) being Class-A.

Ratliff adds that within the next six months, there are approximately 1,486 units planned for construction in Salt Lake City, primarily in the up-and-coming Granary District, downtown Sandy’s Civic Center area and South Jordan.

This upsurge of multihousing development only recently picked up steam. Between 2000 and 2009, only 24 multihousing projects (approximately 5,500 units) were completed, but between 2010 and 2014, that number jumped to 37 completed projects (approximately 8,000 units).

Ratliff adds that in 2015, the county saw another 14 projects completed with an approximate total of 2,378 units with robust growth in submarkets like South Jordan and Draper. According to NGA’s 2016 Multihousing Kickoff Report, 1,977 units are planned in Salt Lake County for 2016 and another 4,046 units are considered potential starts for 2017.

Amenities arms race

One of the most interesting phenomena occurring in multi-family construction now is a call for both basic and unique amenities.

“Today’s renter prefers flexibility, convenience and the higher-end lifestyle that renting can allow,” Ratliff says. “The decision to rent is no longer made by necessity; it’s a conscious choice. When you construct a property, you have to make it resident friendly by creating spaces to gather socially. Residents also want resort-style fitness centers, pools, controlled access to buildings and parking, common spaces with USB ports, free WiFi, rooftop decks, pet areas, dry cleaning services and bike repair stations.”

Jensen adds that if a developer wants to be competitive in today’s multi-family market, they have to have better amenities than the group across the street. In addition, he says people are also looking for multi-family style homes with garages, large floor plans and added privacy by having a townhome layout that prevents neighbors from being above or below them. Often dubbed the “missing middle,” Jensen says this trend is worth noting because it’s becoming increasingly popular among both millennials and baby boomers, who want to set down roots but don’t want to purchase a traditional home.

Lofgren agrees that there is currently a strong demand for a high-quality product, particularly in downtown Salt Lake City. “It’s a very positive relationship for me because we’re moving well-paying jobs into the central business district and now we have those housing options that are attractive to those workers,” he says. “They feed off of each other.”

Steady as she goes

In 2015, Ratliff says NGA tracked nine significant multi-housing lease-ups with a total of 1,395 apartments leased to current occupancy. Overall, the average leases rented per month approximated 23 in the downtown Salt Lake City, Sugar House, South Jordan, Sandy and Herriman submarkets. All of these submarkets also experienced anywhere from 92 to 95 percent occupancy.

Salt Lake County is also currently sub 5 percent vacancy, which means that out of every 100 units, 95 are currently being leased. “We haven’t dropped below 7 to 10 percent since the 1980s, so it’s a pretty awesome thing to be buying into,” Jensen says.

“We are presently tracking six lease-ups in downtown Salt Lake City, Sugar House, Salt Lake County and South Jordan, with an approximate total of 927 units leased at an average of 20 leases per month per property,” Ratliff adds. “There has been very little softening in the market with averages of 20 leases per month in each of those properties. Downtown we may see some cooling because there are currently about 1,800 units being built at nine locations with the vast majority being Class A.”

Although healthy absorption rates are continuing in the market, Lofgren admits there is currently a level of production that is untested in the market.

“Can and will the market absorb all the new product that’s there? Based on what I see right now, there’s no reason to think it won’t. Is it possible for us to mess that up? Of course,” he says. “But even though I’m bullish on the absorption of everything that’s under construction right now, we’ve all got to be prudent about the volume of product and absorption capacity. How much can the market absorb in a short amount of time? A sponge can only take so much.”

Multihousing transaction volume along the Wasatch Front was also robust between 2010 and 2015—until May 2016, according to NGA data. A comparison of transaction volume in the record year of May 2013 indicates sales at that time of $368 million compared to the May 2016 transaction volume of $185.9 million.

“Despite this change, we expect to see solid transaction volume in Q3 and Q4 of 2016,” Ratliff says. “Average prices per unit have increased steadily since 2010 while income capitalization rates have declined to an all-time low of 5.4 percent.”

Ratliff adds that while investor demand remains high, most investors have cooled somewhat on Class A assets. In addition, the aggressive pricing sellers are demanding has caused a shift toward Class B communities as the overall investor perceptions of rent growth in this asset class may increase through value add and reposition opportunities, he says.

Future predictions

Ratliff predicts there will be continued growth in multifamily housing projects over the next couple of years. “Our absorption figures this year and last year continue to be robust,” he says. “The vast majority of projects under construction and in lease-up are doing really well. Right now, the demographic is still willing to pay a hefty price for new unit, but the elephant in the room is going to be affordability.”

That’s why Ratliff says more than ever, construction will be seen on Class B assets, senior communities and low-income housing tax credit properties. “More Class B is being added to the inventory, and in 2017 the majority of developments we’ll see will be in Class B projects. Developers are updating and upgrading those existing units to bridge the gap between what Class B is currently charging and what Class A competitors are charging.”

Lofgren agrees that affordable housing is an unmet need. “We’re quite aspirational about affordable housing and looking for opportunities or solutions to allow that,” he says. “We’re hopeful for a greater focus on affordability because it’s going to be one of the forces that will shape the market over the next three to five years.”