A Pivotal Year for Multifamily
By Rick Haughey, Vice President, Industry Technology Initiatives, National Multifamily Housing Council
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The apartment sector has been red-hot for almost a decade now thanks to favorable demographics, changing lifestyle preferences and limited new supply during the recession years. However, the market is beginning to shift as new construction is catching up with demand in some markets and, after some delay, the oldest cohort of millennials is finally starting to marry, have children and buy homes.
Given the changing market conditions, many multifamily investors are switching investment strategies. The competition for value-add deals is heating up, as investors search for opportunities to reposition Class B and C properties through renovation or management and operational improvements. Tier-two cities and suburban markets are also attracting investor attention.
However, despite some near-term moderation, market fundamentals suggest that, over this next haul, the industry’s performance will likely still be considered very good by historical standards. Apartment demand from Gen Z and baby boomers is expected to be strong and the capital markets should regulate supply, allowing for a healthy and balanced market for the foreseeable future. While the overall market fundamentals look solid over this next stretch, there are a few trends emerging that could spark some significant changes in how we think about financing, designing and building apartment communities. The industry leaders who figure out how to capitalize on them will likely be rewarded.
1. Short-Term Rentals Provide Challenges and Opportunities
Over the last few years, disruptive technology finally made its way to the multifamily industry with short-term rental companies leading the way. Companies like Airbnb have created money-making opportunities for apartment residents to rent out their apartments to tourists and other visitors for a night or more. The problem, however, is that in many cases, doing so is considered a violation of the resident’s lease and possibly a violation of local ordinances. Apartment owners and managers remain concerned about the effect on existing residents, as well as related risk, liability and security issues. They are also aware that monitoring and preventing the popular practice is difficult. However, some apartment firms are seeing the growth in the short-term rental market as an opportunity to both differentiate and gain ancillary revenue. A recent NMHC survey showed that one-third of apartment manager respondents said they would be open to partnering with a short-term rental company.
Moreover, as the market moderates, vacancies are likely to inch up and lease-ups may become more difficult to execute. These changing market dynamics could create new opportunities for apartment owners and managers to partner with these technology-led platforms. It’s possible that some markets may even see the emergence of apartment-corporate housing-hotel hybrids. However, ongoing changes to the regulatory environment will govern where the opportunities emerge.
2. The On-Demand Economy Revolutionizes Community Design
A new generation of tech companies has expanded the online delivery platform, increased the speed at which customers are served and made the interface more accessible to customers. This change in the delivery of goods and services is leaving its mark on the physical form of the communities we build.
For starters, online purchasing is creating higher package delivery volumes. To deal with the volume, many apartment firms are installing package lockers and package rooms in their communities. However, the growth in online grocery shopping and fresh food delivery through apps like Instacart and PostMates is not only adding to the volume of deliveries on site but also changing the nature of storage needs.
The growth in the on-demand economy is also having a profound effect on car use. Ride sharing services like Uber and Lyft and car sharing services like Zip Car and Maven offer reliable alternatives to car ownership. In fact, in some areas, the services are so popular with apartment residents that some communities now have dedicated Uber waiting rooms. This shift has profound implications for the amount of parking communities provide and underscores the need to make parking space more adaptable to other uses.
The potential for additional disruption is almost limitless. For example, there are now companies that will pick up and deliver your stuff on demand with a quick swipe of your cellphone, negating the need for on-site storage in our communities. For every new system or service, there is impact on the look and feel of our communities.
3. Boomers Make a Move into the Market
Every day for the next 12 years, 10,000 baby boomers will turn 65. While the apartment industry has been obsessed with the millennials, the equally large boomer group has been rewriting the rules of retirement and is ready to emerge as a larger part of the apartment market. Even without changing lifestyle preferences, the sheer size of the boomer cohort means that their numbers among the renting population will increase. However, apartments offer a lot of benefits to the aging boomer population—maintenance-free living, accessibility, community, location, to name a few—that could spur more boomers to downsize.
However, serving this demographic will mean apartment developers, owners and managers will need to better understand their preferences and consider a host of new issues. New services and opportunities for connecting residents with community charitable and volunteer efforts could emerge, as well as opportunities for new technologies, systems that help boomers age in place, as well as larger units.
4. Smart-er Communities Emerge
The novelty of smart home technology caught a lot of headlines and the attention of the apartment industry. During the past few years, some companies pioneered smart thermostats and door locks, seeing a potential marketing and brand bonanza in some markets. However, concerns over hacking, integration with existing systems and the split incentives that can have apartment firms fronting the investments in energy saving technologies and residents reaping the rewards have slowed any wide-spread and comprehensive rollouts of this new and exciting technology.
Despite these challenges, smart home technology is ripe to make a move from novelty to real usefulness as some of the functionality gains scale. New technology is leading to a shift from one-off deployment of cool gadgets to a more comprehensive view of creating efficient buildings and systems. For example, some apartment companies are using sensor technology to monitor building-wide heating/cooling and water systems, capturing important data that can lead to operational and capital expenditure decisions.
5. Tax Reform Could Affect Multifamily Investment
The most significant changes to the tax code since 1986 could happen in 2017 or 2018. And the multifamily industry will surely be effected, although to what degree is still to be determined. The only plan on the table as of press time is the House Republican tax reform Blueprint. The House Blueprint proposes to reduce pass-through tax rates to 25 percent and enable the immediate expensing of business investments (including multifamily buildings), while eliminating interest deductibility. Capital gains, dividends and interest would be taxed at a maximum rate of 16.5 percent. (The tax treatment of carried interest is not specifically addressed, but President Trump has proposed elimination). Like-kind exchanges would also be eliminated in the proposal.
The bottom line is that changes in any of these areas will affect multifamily firms’ ability to invest, which in turn could leave a mark on the transactions market and new development. NMHC continues to work with lawmakers to determine the ultimate impact of any proposed changes on the multifamily industry.
Check out the other articles in our 2017 Trends Series:
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