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.”
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.”
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
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.”
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.
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?”
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.
“Maturing Millennials” or those around age 34 are having babies at a higher rate compared to the rest of their generation. As we’ve previously written, they are influencing the urbanization of the suburbs movement by seeking more space in markets they can afford in so-called second tier municipalities. As Building Design + Construction reports, “…while Millennials are moving out of their parents’ houses and into multifamily developments, the developments that they want are in secondary and suburban communities where they can afford larger, more affordable space. This means they’ll be looking for mixed-use suburban locations with a bit of urbanism, as well as transit-oriented developments so they can get to work in urban commercial centers.”
Millennials also don’t overlook lobbies. “An active, inviting lobby is always important, as it is the first impression that the renter and his/her guests see upon entrance,” says Building Design + Construction. “The lobby should be open and situated like a lounge, evoking the feeling of an extended hangout space.”
In lieu of buying a home and paying a mortgage, Millennial renters prefer to allocate those funds toward higher-end apartments offering luxuries that a starter home would not. In addition to the above amenities, these luxuries include security and concierge services, in-unit laundry and dishwashers, and conveniences such as smart controls for HVAC systems, dog parks, pet washing stations, recycling services and electric car charging stations.
The total student loan debt in 2018 was $1.6 trillion, which has made it difficult for recent college graduates to save. With rents increasing in larger cities, Millennials are seeking side-hustle income property opportunities. Traditionally, this has been conducted by property owners, but Airbnb and certain landlords have recognized an opportunity and market for home-sharing for tenants. Niido Powered by Airbnb launched in 2018 and features rentals in Orlando and Nashville. “Rent your couch, a room, or your entire apartment to offset your rent or pay for your next trip,” according to the company website. “By using your apartment to generate extra income, we enable residents to spend their time and money the way they want, while at the same time supporting a global community of travelers and adventure seekers.”
Traditional package management is causing headaches for property managers. Boxes from Amazon, groceries, and other deliveries inundate front offices (UPS delivered 800 million packages during the 2018 holiday season, up 50 million from 2017. That’s not including deliveries from the USPS and other shippers.). Staff spend hours logging deliveries, and the additional time and manpower is expensive. Residents are feeling the burden by not being able to claim their packages outside of regular office hours. Additionally, there are the legal liabilities associated with lost or damaged items.
Multifamily property managers are adapting by redesigning package rooms and management systems to accommodate tenants in the following ways:
Dedicated Package Delivery Centers
The traditional mailroom is a dying breed, as apartment and condo buildings have been installing dedicated package delivery centers for the last ten years. “Such facilities have grown in number and sophistication as the flood of packages has risen, and as residents’ reliance on them has gone up exponentially,” according to Building Design + Construction.
Package management system disruptors are playing a major role. Multifamily Executive calls 2018 the “tipping point” of package-management automation. Property managers are taking advantage of the technology to reduce costs and create a more self-sufficient environment. Companies like Package Concierge and Parcel Pending allow deliveries of packages in secure lockers that are accessed using touch-screens. Residents receive text messages with PIN numbers to alert them of package-arrival, and they can retrieve them whenever they’d like. The technology is so popular that the lockers are now being used in retail and grocery locations, corporate campuses, and universities.
Creating Community Experience
If tenants are happy, so are property managers and investors. Successful multifamily properties focus on enhancing the resident experience, and designing the right package area helps foster community. Per Building Design + Construction, “Many rental and condominium communities integrate package centers into high-traffic areas. Not only does this make it easier for couriers to find the center and deliver packages, it also makes receiving a package a neighborly event. If planned and designed appropriately, package centers can strengthen community ties among residents. The inclusion of communal tables and recycling bins gives residents the option to open their packages immediately while socializing with their neighbors.”
Renovating package centers and investing in new technology is essential for meeting the demands of today’s delivery volume and tenant needs. The best package-management systems provide secure, 24-hour access, keep package areas neat and clean, and free up time and energy of building staff.
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.
Step into a college dormitory in 2019, and it may seem more like the lobby of a downtown apartment with its modern lounge, higher-end furniture, and recreational space. Student housing today has a new look and feel. According to U.S. Department of Education, higher education enrollment is on the rise, which means there are more students attending college and requiring housing. The needs of today’s college students–greater comfort, privacy, technology, and sustainability–are influencing student-housing design.
College and universities are increasingly accommodating the privacy preferences of incoming students. Many of the communal elements of student housing are changing. With more emphasis on privacy, colleges and universities are decreasing the number of students to a room, as well as students sharing a bathroom. It’s more the rule than the exception for new residence halls to feature private bathrooms and the suite layout for more living space.
Modern Common Areas
With more privacy in student housing living quarters, common areas have transformed into modern, functional spaces. Student housing operators are moving toward maximizing common spaces to encourage student activity. For example, layouts feature lounges, study spaces, kitchens, and laundries that are equipped with comfortable furniture that can be easily re-configured or moved to accommodate different types of events. Green screens, pool and ping pong tables, maker spaces, innovation incubators, and faculty-in-residence present a stark difference from dorms of yesteryear.
Environmental sustainability is a significant factor for today’s college student, and he or she prefers student housing that promotes a greener approach. “Today’s students grew up with sustainable behavior as a norm,” says Jason Wills of the National Apartment Association. “They recycle, expect water and energy efficiency and are comfortable living in buildings that are designed to be sustainable.”
“Environmental responsibility is a priority, and contemporary students seek out eco-friendly living spaces.”
As a result, many residential areas are displaying their sustainable accomplishments and features, such water conservation, efficient appliances energy and sustainable certifications. They want to communicate environmental accountability to prospective residents.
Purpose-Built Student Housing
Purpose-built student housing is a customized program for students who choose to live off-campus, offering unique features like individual leases, study areas, fully furnished units, and roommate matching. These apartment communities are tailored to the needs of students with a hybrid of on and off-campus amenities such as: pools, hot tubs, outdoor living areas, computer labs, study rooms, and coffee shops.
Colleges and universities love to preserve traditions, but it’s clear that some, like student housing, are meant to change. As the social, technological, privacy, and studying behaviors of students develop, student housing operators are responding with more attractive facilities that meet their needs.
Winter is here.
Whether or not the North Carolina Blizzard of 2018 is a harbinger of snow storms throughout the country, you can never prepare your building enough for the season ahead. It starts with fully inspecting the building exteriors, including the roof, walls, and door and window frames, and paying special attention to other parts of the building, including:
Fortifying the Roof
Winter weather can wreak havoc on roofs, making building exteriors and interiors vulnerable to damage from leaks. Snow or ice accumulation, even as it melts, disrupts normal drainage paths, and blocked gutters can redirect it to parts of the building ill-equipped for drainage.
Blocked drains create further problems like concealing standing water which can cause a collapse if the water gets too deep. Adding slope to a roof can help drainage and prevent overload caused by the weight of snow and ice. Take precautionary measures by sealing the edges of high slope roofs to mitigate the risk of ice damming, and installing snow guards to prevent heavy snow layers from migrating to the gutters.
Keeping Lobby Entrances Clean
As the face of your building, it’s important to protect lobby entrances. The foot-traffic in lobbies creates wear and tear on its floors, especially when salt and sand used to treat pavement are tracked in. The answer is laying down safety mats and rugs with efficient spacing. Matting best practices advise 5 to 10 feet of coarse matting outside a building, 5 to 10 feet of matting directly inside the building and another 5 to 10 feet of matting directly behind it.
Protecting Your HVAC System
Your building’s HVAC system is pivotal to the comfort and safety of tenants and guests. In addition to maintaining temperature and air quality, an HVAC system serves as the first line of defense against inclement weather.
In an interview with Buildings, Kevin Miskewicz, Director of Commercial Product Planning at Mitsubishi Electric, notes that “Properly protecting your HVAC system from extreme weather conditions can improve its performance and lifespan. Investing in snow hoods, wind baffles and outdoor unit stands prevents snow and ice from getting inside the equipment and potentially causing damage.”
Thinking Through the Entire Process
Optimizing the conditions of roofs, lobby entrances, and HVAC systems are measures that will help protect exterior areas of buildings. More importantly, they will contribute to the safety of building occupants. To that end, here is a concluding safety tip:
Have a rock-solid snow removal plan. Leftover snow can freeze into ice, increasing the chances of slip-and-fall injuries. Snow drifts obstruct important signage and can conceal fire hydrants and handicap parking spaces.
First impressions are everything.
When prospective tenants enter a residential or commercial building, they walk through the lobby first, formulating opinions quickly. A unit or office may be beautiful, but the lobby serves as the face of your property and should accurately depict your company’s brand and culture.
Follow these best practices to attract tenants with your lobby design:
Create an Inviting and Clean Space
Every lobby should have a welcoming vibe that is felt from outside and inside its doors. Appealing to the senses, especially sight and smell, seems like stating the obvious but is often overlooked. Hiring the right maintenance, cleaning, and landscaping companies is key to upholding the image of your property. It starts with the outside. Similar to the curb appeal of a house, maintaining the building’s exterior with improvements to the green areas, for example, can enhance the appearance of your property. Keep sidewalks, walkways, and steps swept of debris as well. Inside, floors, surfaces, and walls should be spotless. In addition, designing the interior with indoor plants and art can create a more aesthetically pleasing environment for tenants.
Make Your Lobby an Extension of the Community
Knowing your neighborhood goes a long way with tenants. When you adapt your lobby to your neighborhood, be it an urban or suburban environment, you foster community, according to Building Design + Construction. they write,
“Create a brand and a place that amplifies the unique qualities of your neighborhood.”
A property located in an urban environment with a wide variety of entertainment, dining and socializing opportunities should feature a lobby that complements those easily accessible amenities, while providing options that will benefit the larger community and bring visitors, commerce and new interest to your building.
Host Lobby Events
People are attracted to a crowd, and when they see others gathering in a space, it piques their curiosity. Whether for an office or condo building, lobby events provide an opportunity for face-to-face interactions with current and prospective tenants. Kirk Layton, President & Founder of the Canadian-based Eservus Online Concierge Services, says this personal touch is much stronger than a building newsletter or tweet. “You only have a few seconds to grab people’s attention in the building lobby…after all, tenants in the lobby are always on their way to somewhere else – to work, to lunch or to a meeting – which makes it difficult to capture their attention,” he writes. “Lobby events are an indispensable part of a property manager’s tenant engagement strategy.”
The Bottom Line
The design of your lobby presents an ongoing opportunity to attract and retain tenants. In today’s ultra-competitive market, demonstrating that you care about tenant comfort and their needs through strategic design is a significant differentiator.