Andy Propst is CEO of HomeRiver Group, a Meridian company that has acquired a half-dozen property management companies around the nation in the last two years and now manages nearly 5,000 rentals in 20 states.
When Propst joined the company in 2008, it was called Park Place and had 200 rental units. Its owners at the time made him a full partner nine months after he came on board. He also served in 2015 as the national president of the National Association of Rental Property Managers, or NARPM.
Multifamily owners and managers like Propst are working in the tightest rental market in memory. Although there’s apartment construction going on in Idaho cities large and small, apartment growth, which stalled heavily in the recession, hasn’t caught up with the demand created by population growth and market conditions. Apartments have become scarce as members of the large millennial generation move out of their parents’ homes and baby boomers sell their houses and retire to more urban areas. Migration from other states is also driving the growth. Propst said in 2010, one rental application in ten was from out of state; now nine in ten are.
Propst spent some time talking to the Idaho Business Review about the multifamily real estate market in Idaho and elsewhere. The interview has been edited for length and clarity.
Why is the multifamily market so hot?
During the downturn, there were three years where in Ada and Canyon counties, only one duplex was built. Then it went back to normal, about 1,000 doors a year. Now, we’re producing 3,000 doors a year, so we’re trying to catch up for the years between 2008 and 2012.
A lot of roads are coming together. The economy is getting better, and a lot of people 18 to 33 are starting to migrate away from their parents. You also have delays in marriage causing people to rent longer, delays in having children, you have people having less children, you have an increase in single mothers over time, you have more divorces. One out of every 10 calls we get is, “Hey, I am separating, we now need two households.” There are just more people.
You can’t ignore that there are multi-millions more people in the millennial bubble than there were in baby boomers. All of them are coming into the market at the same time. The baby boomers are downsizing, getting rid of the house that the kids are starting to move out of. Or they’re saying it’s a good time to sell the house because the market has come back.
All reports say apartments are getting more luxurious. What’s prompting that?
There used to be a stigma where renting meant you’re not moving up and progressing. The American dream has really gone from a stable white picket fence to flexibility. The average person from 25 to 55 has 11 jobs, and it’s hard to do that owning a house. A lot of the millennials watched their parents lose their shirts in a downturn.
There are quite a few apartment complexes planned for downtown Boise. Are they overdoing it?
No. We’re trying to catch up. If they’re having a hard time getting those things leased up, it’s probably the price point, not the demand. To go vertical in a major city and provide parking … every deal that has multi-level parking doesn’t make sense in Idaho. We’re way too behind on rents. We’re one of the cheapest places in the country to rent.
They do need the parking, right?
Parking adds anywhere from $30,000 to $20,000 per door, and you just can’t make it up in the rent. Plus when you start going vertical, it gets more expensive the higher you go. When we have almost unlimited space going south and west, and we’re in such a commuter-friendly city, it’s hard for people to justify living two or three miles closer paying two or three times the rent when they can go up to Fairview or pay less. It’s so easy to get in and out of Boise.
How does Idaho differ from other markets?
Idaho has a unique model of multifamily housing. It’s the fourplex, the eightplex model. In other markets, fourplex is a four-letter word. Nobody has built a fourplex since the 1970s. In Texas, investors are running from that. Here, a fourplex is an A-plus garden-style property.
Whereas in other states all the new multifamily product that is being built goes for density, we have almost unlimited land. We can spread these out, and make it more of a home living situation vs. just jamming people in and going vertical. That’s what our renters kind of like. Even though they may be in a townhome, it feels like a home. They stay longer, the occupancy is higher; it’s a function of the product and the market. If you don’t have a neighbor above or below you making noise, you’ll be happier. If you’re in a five-story walkup, it gets noisy and that gets old.
Also, salaries are low, but rent is so cheap here compared to Portland or Salt Lake for the same type of product. If you go to Denver, it costs twice as much.
People are complaining that rent is going up, but rent is not going up anywhere as fast as home prices are. We’re seeing 3 to 6 percent rent appreciation a year, and home appreciation is 9 percent a quarter.
The other thing that separates Idaho from any other states we manage in is the amount of delinquencies. There are basically zero here. It’s a very low-risk market to invest in because the tenants always pay their rent, and it’s a very landlord-friendly state, meaning if they don’t pay, it’s pretty easy to get them out. That has something to do with it.
It’s very refreshing compared to some of the areas that we manage in. In Portland, it will take six months to do an eviction. People stop paying all the time.
In Idaho, if you do it right, you can have a non-paying tenant out by the end of the month. Our courts are not backed up for miles on evictions, whereas in some of these other courts you can wait a long time because there are so many delinquencies.
Isn’t that kind of harsh for tenants?
It’s harsh because everybody here pays on time, so there’s not this massive backup of tenants. I don’t know if I’d say this is landlord-friendly. From the landlord’s perspective, if somebody is living in your property and not paying rent, that’s a problem. Our job is to enforce the terms of the lease.
We manage almost 5,000 doors in Boise, and we don’t have a single tenant who is a month behind. In this market, why wouldn’t you evict someone when there is a line of tenants who want that product behind them?
What kind of apartments are people looking for?
It is an emergency situation for affordable apartments. That’s where we need subsidies of some kind, because nobody is building B or C properties; everything is A.
It’s pricing out the people who need affordable housing, because everything coming on has granite countertops, hardwood floors, and this is where my heart bleeds. If you’re a single mom or a family that is struggling and you need some type of product, there is literally nothing for these type of folks. The only thing that has been built here since the downturn is all A property, because land costs are high and construction prices are high. An A property today will be a B property in 10 years.
What is the solution to the shortage of affordable housing? HUD needs to come out with better tax credits. They’re just not available. To my knowledge, there are not any affordable housing options available that would work in a market like this.
There’s really nothing in that $700 to $900 price point with two bedrooms, two baths. If you want that, you have to pay $1,100 to $1,200.
What are your predictions for the market?
People keep saying the prices are going to tap out at some point. When we sold our first fourplex in 2011, it was $265,000. It was in Nampa, right by the College of Western Idaho. It’s an awesome location. Today, if you were going to built it, it would be $550,000.
Market demand, construction, land costs, all those things have pushed the price up.
In 2010 and 2011, back in the day, It was $70,000 per door for a fourplex. Now, that same product, it’s $143,000 per door.
I hear all the time that we’re at the top of the market, but here’s the thing: California has started to introduce this law to add rent control. That’s pushing California investors to sell their properties at a very low cap rate, a 3 percent cap. They can buy in Idaho at 6 percent cap, doubling their investment return. Out of the 4,000-plus doors we manage, California investors probably own 60 to 70 percent.
All these California investors are selling to Chinese investors at stupid low cap rates, and that’s going to push our market higher than we can even wrap our heads around.
The rents are going to continue to stay at a normal rate of increase, 3 to 6 percent, but the investors will pay more. The investors are now paying $700,000 for a fourplex that would have cost $265,000 to build in 2011.
I have a graphic that shows that between 2016 and 2020, according to Green Street Advisors and the Bureau of Labor Statistics, that typically with this job growth, population growth, these demographics, you’d see 65 percent move into homes, and then you would see 35 percent into apartments or single family rentals. But they say the exact opposite is going to happen. They’re predicting that 65 percent of the new households formed will be renters. The new generation feels anxiety at being tied down to something.
Do you build apartments?
How we’ve grown is I find builders, investors, land and put all three of them together and we make property. That’s every project on our website, basically. We create opportunity.