Multifamily Update & Forecast
Heading into 2015 some slowdown was expected for Multifamily, yet demand has continued despite new supply coming online. Vacancy treks downward with nation occupancy at 96.2 (vacancy 3.8) the best since a very brief moment in 2006. Vacancy is down 40 bps this year to functionally full across most markets.
Rent growth continues at an impressive pace, up to 5.6 % YOY for new leases. That’s the highest pace since the tech boom ten years ago. Hot markets like the Bay area, Seattle, and Denver were expected to taper off, but have kept climbing. Also, the late recovery cities like Los Angeles, Phoenix, and Atlanta are thriving.
Class A and B units have the most demand, and while the C market has its challenges, rent growth is still running 3%. Where you see divergence is between urban and urban. Suburban A is the top performer while urban A’s suffering from over supply and too much competition.
Developers’ conventional wisdom is that the burbs have lower barriers to entry but actually that’s a myth. Cities welcome development if the space can be found. Approval for infill in a desirable suburb will have to overcome roadblocks from local NIMBYs and zoning challenges.
National cap rate average was 5.8% for Q3, with the lowest for high-rise urban. This has pushed investing into secondary markets, garden style and Class C. We’ll see more compression with Milestone and Starwood concluding some large deals in Q4.
Underlying renter demand will continue very strong. Investor concern is rising, but underlying fundamentals are solid with no signs of a bubble. More sellers will step forward, and there’s plenty of capital and buying interest from overseas.
While we expect further slowdown in the urban submarkets, we’re talking about a reduction in rent growth. With a moderated pace down to 4.0% this is still quite good for investors.
Advice to Investors
Do your homework on suburban verses urban. Don’t assume that the suburbs are underperforming. They are often a better bet for investors – take another look.
Multifamily: The Future is Today
Today’s apartment buildings have evolved light years from what we built even twenty years ago. Advances in technology and energy conservation, rising material and labor costs, and the changing demands of new generations have reshaped the multifamily landscape.
Tim Schrager of Perennial Properties and Ryan Holmes from RISE joined me for this discussion on the future of multifamily real estate. Perennial develops mixed-use urban – apartments with ground floor retail. RISE plans and develops contemporary student housing.
Building Costs Balloon
It’s taken a lot of recovery to get new construction out of the ground. Costs are high and rising, mostly on the labor side. For a basic stick frame project, Holmes explained, all-inclusive runs in the high 100’s per unit, and that’s in a modestly priced market like Atlanta. Costs vary a great deal by region. Price per square foot in Atlanta or Daytona runs around $83. In New Jersey you will pay $292.00 for the same, not including land and furnishings.
Those prices were unheard of only a few years ago. There’s a shortage of labor for this kind of construction.
“For example, on a recent project estimated costs ballooned from $59 million to $73m. We’re redesigning to rein it back to $66m. Major cost swings like that can eat all the developer’s earnings.”
The High Tech Apartment Game
Technology is essential for today’s renter; not only for home connectivity but also how they will discover and lease the apartment.
Developers of new properties are spending more than ever on technology to provide the features tenants demand. Providing broadband access is not negotiable; tenants will go where they can get it. We’ve also had to install cell phone boosters in some buildings. The network has to be there.
Technology has revolutionized how the apartment business is managed. Millennials and younger don’t bother with classifieds. A desirable tenant wants to find you online, tour and compare your product to the competition. Then they’ll choose, make a deposit and even sign a lease without getting off the couch.
Leasing online is much more effective than it was just a few years ago. The new HD virtual tours are a much more realistic and convincing experience. Of course, this all needs to work well on a mobile phone, or you’ve lost the customer to your competitor in seconds.
The marketing game continues to change, and you need to know the landscape. Business information partners like Costar have made a huge splash on TV with brand-building ads for apartments.com. Yes, they are driving users to the site, but what they are really doing is building a national database of apartment leads. Stay tuned!
Student Housing Boom: Not Your Daddy’s Dorm
There’s plenty of demand for new student housing. Replacing worn out apartments from the 50s through the 70s and providing student living that works for today is a thriving business for RISE Real Estate, led by CEO Ryan Holmes. They finance, build and manage student housing around the country. They’ve found that keeping all three phases in-house gives them the best results.
The projects are designed and built differently; smaller individual spaces in exchange for larger common areas. Generation Z is not interested in repeating the mistakes of their parents.
These apartments create households of people who don’t know one another since they are leased by the bed. The property is campus-like, rich with amenities. They have large common areas with coffee bars and snacks. RISE has found that having active social spaces are essential for competing successfully.
“No one studies alone in his or her room anymore,” observed Holmes. “Students are collaborative in their studying, just like they will be in the workplace.”
Our lounges are built out like a coffee shop, with a pool table, shuffleboard. We have public space furniture on wheels to reconfigure space as needed.
You’ll see fewer parking spaces, more of them with charging stations, and a large bike storage facility. Of course there’s a pool and fitness facility. People expect to live with companion animals. Our buildings are pet friendly, including a dog wash and a dog play area, space permitting.
The management is much more involved than in basic apartments, and requires a higher percentage of staffing. But tenants are willing to pay for amenities and service. Holmes noted that their projects are already leased to 80-85% by the time the paint is dry.
Join Your Apartment Association
Tim Schrager is also Chairman of the Atlanta Apartment Association, and he wants you to join your local and national apartment associations. They perform two invaluable services for the multifamily professional: advocacy and education.
“We provide all sorts of training for our members,” Schrager explained. “The association also works with universities to develop and promote the profession.
“Multifamily housing is a major employer and a growth industry. The success of investors relies on quality management. For this reason alone we want students well prepared for professional life in the multifamily industry.”
Advocacy is also mission-critical. Apartments are a big industry, supplying many jobs as well as housing. Misguided regulations can have a far-reaching impact on owners, investors, employees and tenants alike; so keeping our representatives informed about key issues is a top priority.
“We need input from all the members of the multifamily community,” Schrager urged. “Join your association today.”