Our Principal Ira Singer shares his insights on how multifamily investors can achieve the greatest ROI on their properties through value-add renovations while ensuring that workers are practice COVID-19 protocol. With a recession looming, Ira discusses how choosing building improvement projects carefully is more important than ever before. For multifamily owners and investors, it’s essential not to over-improve a building; updates that reflect the asset class of the property are most advisable and should be designed to drive occupancy and increase rents.
Read more of Ira’s thoughts on RE Journals.
As we previously reported, 2018 was a banner year for multifamily housing, with a 44% increase in sales accounting for more than 30% of the total U.S. real estate investment sales. What is the health of the 2019 multifamily housing market through the first two quarters, and where will it go from here? Freddie Mac has answered these questions and more in its Multifamily 2019 Midyear Outlook. Overall, the outlook is positive, showing signs of sustainability and growth for the remainder of the year and beyond.
According to Freddie Mac, “In our research, we find that strong economic growth and the robust labor market continue to support the strength in the multifamily market. Last year ended much stronger than anticipated with near record absorptions and stronger rent growth compared with the prior few years. The first two quarters of 2019 saw mixed results, with slower growth in the first quarter, but preliminary second quarter information indicating the spring leasing season is off to a strong start. Along with the strong fundamentals, lower interest rates continue to drive origination volume higher throughout 2019.”
Low Unemployment is Having a Favorable Impact
It is anticipated that the labor market–with low unemployment and wage growth–will continue to drive housing demand, benefiting multi-family properties. As the report states, “Pending any broader economic event that would impact the labor market, there is no real estate specific headwind on the horizon that could disrupt the favorable outlook for multifamily through the rest of this year and into the next.”
Loans Increase While Absorptions Dip
Multifamily originations–or fees associated with processing a loan–are continuing their upward trend from 2018 through the first two quarters of 2019. Originations have increased by 8% to $336 billion. “The 10-year Treasury reached 1.75%, a decline of 150 bps (basis points) from last November,” the report says. “Rate declines generally drive origination volume higher, and with a drop of this magnitude to very low levels, forecasts must be decisively higher than earlier in the year.”
Absorption rates, by contrast, saw strong gains in 2018 only to stall thus far in 2019. “The first quarter of 2019 saw absorptions wane and high levels of new supply entered the market, but strong gains in the second quarter suggests the trends for multifamily are not yet turning.”
“In our research, we find that strong economic growth and the robust labor market continue to support the strength in the multifamily market.”
– Freddie Mac
Higher Demand and Lower Supply
Multifamily demand is outpacing new supply, as there is a shortage of housing compared to households. Total housing completions over the past three years have averaged 1.1 million housing units each year, while the number of households have increased on average 1.4 million. Per the report, “The continued increase in multifamily construction when the overall housing market continues to remain unbalanced is not necessarily an oversupply concern as the economy struggles to build enough housing.”
Steady Growth Ahead
The multifamily market is bright. Freddie Mac projects overall growth for the remainder of 2019 and into 2020 with high-demand spurring on new construction. “As this supply enters the market, we expect vacancy rates to increase throughout the year, but only marginally, up to 5.2%. We anticipate that rent growth will remain healthy at around 4% in 2019.”
MB 170: MAXIMIZING ROI IN VALUE-ADD MULTIFAMILY DEALS – WITH IRA SINGER
Announcer: This is the Apartment Building Investing Podcast, with Michael Blank, episode 170. Let’s do this.
Announcer: You’re listening to the Apartment Building Investing Podcast, where we’ll talk about all aspects of buying apartment buildings with a special focus on raising money from others.
Announcer: And now, your host, Michael Blank.
Michael Blank: Hey everyone, and welcome to the show. I am your host, Michael Blank. I’m super excited that you’re here to learn more about apartment building investing. The best way to become financially free with real estate.
Michael Blank: Excited about today’s show. We’re going to talk about construction today, and the different ways that we can build value.
Michael Blank: So actually I have two guests. A construction expert, and someone who’s very, very intimately familiar with ROI based on amenities, and other improvements. So we’re going to really drill in on how to manage a construction company, and different ways you can add value to a value-add deal.
Michael Blank: I also want you to know, I’m being really, really active, or trying to be, on social media. Actually on the Facebook page, and Instagram, the handle is themichaelblank, that’s T-H-E- Michael B-L-A-N-K. So hang out with me there. Say hello.
Michael Blank: I also have a new Facebook group called Apartment Investor Networks. I’ve got several thousand people on there, and so myself, and our mentors, and our advisors, are active there. It’s a great place for you to ask questions. So make sure you check us out.
Michael Blank: Hey, in a couple of weeks, we’re going to be at Deal Maker Live. That’s July 26, 27, in Dallas. We still have a few tickets left. We’re expecting well over 500 people there, and we just added a few more tickets to that. So head over to dealmakerliveevent.com, or just google Deal Maker Live, and try to grab your tickets before they’re all gone. So we’re going to have a huge lineup of multifamily experts there, including Robert Helms, real estate guys Joe Fairless, Michael Becker, Adam Adams, Corey Peterson, and our keynote is Hal Elrod, the author of The Miracle Morning. Super excited to get to know him a little bit more, as well.
Michael Blank: All right. So with that, let’s get right into the show here, to learn about construction and ROI.
Michael Blank: Ira, welcome to the show today.
Ira Singer: Thank you. How are you?
Michael Blank: Very good. Very good. So we’re going to get all into construction, and ROI to get out of that construction. So I’m really excited to get into it.
Michael Blank: Before we get started, just give us a quick background on you and your company.
Ira Singer: Thank you. My name is Ira Singer. I am one of the principals at Mosaic Construction. We are a general contractors in Northbrook, Illinois, with a construction management practice that prefers the design build methodology, where we are at the table, helping with selection of finishes, scope of work, pre-budgeting.
Ira Singer: But we are experienced and adept at working in the multifamily industry, both in asset classes from market rate, to affordable, into senior housing. We’ve worked in student housing. We’ve done, in our geographic, and adjacent to our state, we’ve had value-add. We’ve had repairs, exterior work. There’s a lot of things that we have experience in, from both an exterior, and an interior point of view. We’ve worked in units. We’ve made accessibility choices with our clients. So it runs the gamut.
Ira Singer: I’m looking forward to our discussion, and what I can help your listeners with. So let’s get going.
Home-sharing is a multi-billion dollar industry that is gaining momentum with unlikely allies: multifamily property managers. Traditionally, multifamily property managers have made cash off long-term leases and rent costs and prohibited home-sharing because they violated rules and regulations. But a report from the National Multifamily Housing Council (NMHC) estimated that about 65% of recent Airbnb bookings were in multifamily buildings, including apartments, condos and even in-development hotels. It also found that 43% of property managers have had short-term rentals occur without their approval. To legitimately meet the home-sharing demand, companies are bringing their innovations to multifamily property managers. Apartments Doubling as Hotels
Among the operational challenges that multifamily managers encounter is what to do during dry leasing periods. Enter companies like WhyHotel and Stay Alfred that take un-leased apartments and convert them into furnished, amenitized hotel units. This pop-up hotel model has been gaining traction. Zak Schwarzman, an investor in WhyHotel, told Forbes, “It’s no surprise that companies in this category with a clear value prop are receiving a warm reception from the multifamily community. WhyHotel offers developers significant newfound revenue by managing their yet-to-be-rented inventory as short-term hospitality during a building’s lease-up period. Who would say no to that?”
Stay Alfred focuses on market rate properties, providing a more upscale, short-term hospitality experience. In addition to furnishing empty units, the company rents them and staffs the buildings. Legitimate Short-Term Rentals
To eliminate the notion of black market short-term rentals, multifamily managers are taking a proactive approach to the leasee-turns-landlord problem. YOTELPAD in Miami became the first condo community to permit restriction-free short-term rentals. David Arditi, founding principal of Aria Development Group, the developer of YOTELPAD, told Forbes, “We’ve heard many stories of residential buildings having to deal with owners who are trying to skirt local legislation by renting out their units on a short-term basis. They are typically not allowed to do so given condominium association and zoning restrictions. We thought, why not do something that addresses this head on and gives people the option to do what they are asking for?”
Making life easier for multifamily property managers are companies like San Francisco-based Pillow, which provides the tools for property managers to control all short-term rental hosting in their buildings, as well as share in the revenue, ensure local regulatory compliance, and insure against damage.
Multifamily home-sharing has the support of NMHC and the National Apartment Association, two of the most influential industry and advocacy organizations. “NMHC/NAA support the right of multifamily firms and other property owners to participate in all aspects of the sharing economy, if they so choose, and if it is done in full compliance with existing law and regulations,” according to an NMHC home-sharing fact sheet. The fact sheet emphasizes that the choice is ultimately up to multifamily property owners, but it encourages the practice as it creates additional revenue streams. “Policymakers at all levels wanting to regulate the short-term rental market should be cautious as to not inhibit the benefits of the sharing economy, while ensuring that the protection of private property rights and contractual obligations between property owners and residents are respected.”
Multifamily home-sharing is more than a trend and will seemingly continue to evolve. We previously covered Airbnb’s entrée into the multifamily property manager partnership with its Niido brand, which launched its flagship property in Orlando. The program has been so successful that the company is expanding into Nashville with plans to open up to 14 more properties by 2020. This combined with the momentum of short-term rentals positions the home-sharing model to generate more cash and lower operational costs to reduced unit turnover and improved brand awareness for multifamily property managers.
The multifamily housing market has been growing steadily in recent years. According to Housing Wire, sales increased by 44% in 2018, accounting for 31% of the total U.S. real estate investment sales. A primary factor is that apartment building owners and managers recognize that they can increase value by upgrading and renovating functionality and the overall aesthetic appeal of common areas, amenity spaces, and unit rooms.
Particularly in urban areas, Building Design and Construction says apartment sizes are shrinking while common areas are expanding. Tenants, especially Millennials, are willing to sacrifice living space for larger common areas that provide functional spaces for social activities and ad hoc work environments. Buildings are equipping common areas with more robust technology like USB ports, reliable WiFi connections, iCafes, and other web-access. Common areas are also being renovated with more durable furniture and flooring to handle increased usage.
The National Apartment Association’s Adding Value in the Age of Amenities Wars report notes that rooftop decks are the most valued outdoor amenity. In mid and high-rise buildings, rooftop decks and terraces are in high-demand with desired features like outdoor kitchens, grills, sound systems, big-screen televisions, and comfortable seating. The report also reveals that fitness centers rank at the top of the list for community-wide amenities. Fitness centers have evolved in only the past few years from workout rooms to including space for classes like yoga, resistance training, and wellness.
Multifamily housing sales increased by 44% in 2018, accounting for 31% of the total U.S. real estate investment sales.
Building owners are accommodating the needs of bike and pet-owners, as well. The high cost of parking spaces means more bike-usage, and multifamily owners have responded by providing bike stations for parking, storage, and in some cases, parts and repairs. Pet-owners represent a large demographic of residents, and they expect amenities such as grooming, sitting and walking services, parks, and sometimes spas. “Many apartment communities today are going above and beyond for their residents and pets by offering awesome accommodations,” according to Apartments.com.
Kitchens renovated for style and functionality are a value-add for multifamily living. Kitchens are trending toward incorporating mixed materials like wood, metal, stone, and glass. In larger units, multifunctional islands are used for dining, entertaining, and workspaces. Additionally, multi-use countertops feature butcher blocks, wireless charging areas, and food scales.
If the upward trends hold, and as municipalities continue to swell in population, multifamily housing construction must keep pace with demand. Building owners and managers will gain a competitive advantage and realize better return on their investment by creating the upgrades that attract prospective tenants.
Read more about How to Attract Tenants With Your Lobby Design.