Turning the tables

What’s old is rarely ever new again in multifamily housing. Developers and managers have long had to hustle to keep up with the rapidly changing nature of living spaces, resident preferences, and market fluctuations. Recent dynamics have followed suit, and more than ever, real estate managers have had to get creative and resourceful just to keep up.

Trends in multifamily housing

Like in much of the real estate industry, trends in multifamily continue to be driven by events larger than the sector. The impacts of the COVID-19 pandemic are evident in property operations, the services and amenities sought by residents, and the overall demand for different types of multifamily properties.

Broad economic and demographic forces are also at play. For example, according to the National Association of REALTORS^®, millennials aged 22 to 40 made up the largest generational share of homebuyers, at 37%, from June 2019 to June 2020. A total of 58% of millennial homebuyers aged 22 to 30 and 50% of those aged 31 to 40 rented an apartment or house before buying a home.¹ As millennials move on from renting, Generation Z becomes a key target market.

Another factor influencing multifamily housing is the preference for suburban versus city living. The population flow has long been important to multifamily, impacting everything from owner investment choices to occupancy rates. Generational change and the pandemic have been significant factors in where people want to live, and the recent impacts on multifamily housing will likely remain in play in the long run.

Rent collection

Rent collection remains a focus of multifamily managers, especially for conventional apartment properties. Eviction moratoria issued by federal and state governments took away a necessary tool to maintain the financial stability of properties. While rental assistance programs helped with the hit to revenue, many owners had to use their own funds to keep property operations going.

Amanda Cox, CPM, ARM, CAM, Wehner Multifamily

Amanda Cox, CPM, ARM, CAM, regional director of operations with Wehner Multifamily, explains the recent experience she’s had with her portfolio. “Properties are still responsible for paying the mortgage, utilities, payroll, and everything else, whether the residents are paying their rent or not,” Cox says. “Assistance programs helped mitigate the delinquency, but some properties required cash infusions from the ownership.”

Cox explains how the impacts have reverberated into 2022. “Elective improvements and renovations were deferred where necessary, and these were budgeted in the following year,” Cox says. “We’re also budgeting for higher bad debt due to early lease terminations and evictions, and we’re anticipating higher turn costs to make those units ready for our incoming residents.”

One bright side—prohibitions on evictions—gave managers new skills and resources to help struggling residents. New practices around helping residents find and get support don’t necessarily have to go away at properties where rent collection frequently requires more attention. These practices give managers more ways to keep units occupied and profitable.

Many companies have also learned to work with governments to shape sensible policy, as they’ve done with rental assistance programs to make them more targeted, accessible, and in line with owner interests. Those skills may be extended to other areas of public policy that impact multifamily housing.

Demand for apartment living

Abigail Rex, CPM, ARM, American Assets Trust

The demand for apartment living remains strong, despite recent headwinds. Variations do exist by market, the nature of the property, and the resident population. Abigail Rex, CPM, ARM, American Assets Trust’s vice president of multifamily for San Diego, explains the situation for her own portfolio of properties.

“It’s incredible. The demand for housing has been stronger than ever,” says Rex. “It’s one of the tightest housing markets—if not the tightest—since I’ve been in this industry. I’ve seen year-over-year rental rates move upwards of 10%.” She says that occupancy rates have floated in the mid- to upper-90s, depending on where in the County of San Diego the property is located.

Cox tells a slightly different story for her portfolio in Texas and Arkansas. Despite recent market events, she’s successfully raised rents, minimalized loss to lease upon lease expirations while securing renewals, and maintained stable occupancy. One factor in this success is the nature of the properties. Her company specializes in Class B and C communities, which have captured Class A renters seeking more affordable living during the pandemic.

On the other hand, Cox’s company has had to take measures to control expenses by “renegotiating service contracts and pulling back on any expenses that aren’t necessary to property operations or the resident experience.”

Cox‘s company has also projected to be more conservative with rental increases. “The ability to increase resident retention is our focus, which is more affordable for the property than the vacancy loss, marketing costs, and make-ready expenses incurred due to the loss of a resident,” Cox says.

Rising costs of materials and labor

Inflation is an area of concern for multifamily real estate managers. “We have all seen and felt the huge increases in costs for building materials and commonly used products that we may have taken for granted, like paper, coffee and tea, water, and cleaning products,” says Rex.

Contracted maintenance has subsequently become more expensive. Rex explains that it had been standard to budget a 5% increase for contract maintenance and materials costs; their projections for 2022 include budgeted increases upwards of 15%.

Capital budgets have also felt the squeeze. “Our capital expense budgets have been cushioned upwards of 30% to account for the rising costs of building materials such as lumber, steel, roofing materials, paint, and more,” says Rex.

These rising costs come at a time when resident preferences for amenities are shifting, and improvements may be necessary to maintain competitiveness and give residents the living experience they demand. Rex shares an improvement that her company recently made because of the pandemic. “We turned a tanning salon amenity space into a virtual fitness room that offers personalized fitness training sessions without having to go into the gym.”

Another factor to consider: the rising costs and demands to pay and retain top talent. Both Cox and Rex cite labor expenses as a further challenge. “I’d expect to see year-over-year increases on payroll and payroll taxes,” Rex says.

The good news? Companies have invested in technology that creates efficiencies and potentially brings other expenses down. Both Cox and Rex indicate that technology is a key opportunity in attracting and retaining residents and making property operations more streamlined. These investments will reap benefits for owners and residents long after COVID-19 is no longer front-page news.