The Ever-Evolving Multifamily Market and How to Prepare
Are demographic shifts creating new housing and investment opportunities that appeal to multi-generational groups? Are millennials driving innovation? Is there a sense of economic uncertainty for property owners and investors? And is technology driving some of these changes in the real estate market?
The short answer is yes to all of these questions. And that’s contributed to enormous growth in the multifamily housing market, a segment of the broader real estate market that’s been on fire for about a decade. For investors, the multifamily housing market offers tremendous opportunity. In fact, it is one of the most active investment classes for both private and institutional investors. No wonder, as the industry’s 35 million residents drive a $1 trillion dollar annual contribution to the US economy, according to real estate brokerage Marcus & Millichap.
But with growth comes competition and increasing levels of risk. Specific to the commercial real estate industry, those concerns include: lack of risk management dedication for multifamily housing, changing insurance solutions as technology drives residents’ needs and demographic shifts and urbanization. The goal is to be strategically positioned to capitalize on the opportunity, well-prepared to engage in the heightened competition and nimble enough to manage the risk.
State of the industry
Experts continue to keep an eye on affordable housing. While the multifamily market has been expanding over the past 10 years, those in the multifamily industry should pay close attention as it could pull back a bit after years of unprecedented rent growth.
Though experts like Freddie Mac say the multifamily market is expected to remain solid throughout 2017 and into the next year, it could be marked by increasing caution and more moderate growth, causing investors to become more selective and a number of headwinds to form, including in the areas of:
Let’s take a look at each of these more closely.
Traditionally, multifamily living was primarily seen as a short-term living solution. But more residents now become renters by choice and commit to multifamily living for the long-term. This is driven in large part by millennials who prioritize convenience and proximity; they want to live near their places of work. But it’s also a financial decision, as many millennials are carrying large amounts of student debt, making it nearly impossible to secure home loans at reasonable rates. Meanwhile, the Brookings Institution has data showing that suburban growth is eclipsing city growth, upsetting a long-held belief in exponential urbanization. For owners or managers of multifamily properties, this means:
Sustainability can no longer be an afterthought.
Infrastructure has emerged as a key real estate development issue, ranking nearly as high as land and construction costs, according to the PwC Emerging Trends in Real Estate 2017 survey.
The future of multifamily will belong to owners and developers who understand and can weather market fads while responding to tenants’ work and lifestyle needs.
Potential economic directives by the Trump Administration have multifamily property owners keeping an eye on Washington. This uncertainty could have implications for several areas critical to the multifamily sector, including:
Regulation: If the search for permanent commercial real estate (CRE) debt capital becomes more intense, competition for capital is likely to intensify; which could then cause the lending environment to become more restrictive.
Housing affordability and credit constraints: For buyers, declining affordability and stringent credit requirements raises questions about where younger households will live, where the workforce will reside, and whether affordable services will be available for aging baby boomers.
Our connected society – what has come to be known as the Internet of Things (IoT) – is connecting us like never before, not only to each other, but also to inanimate objects, including the cars we drive and the buildings in which we live. Today’s multifamily residents are looking for apartment homes with features that give them a greater sense of control. That might be smart thermostats, lighting, or other web-enabled features. They want buildings that are more energy efficient, secure, and responsive to changing conditions.
But a connected world also opens up new vulnerabilities and risk exposures that were not considerations — or only in their infancy — 10 years ago. If a company sustains a cybersecurity breach, the damage can be both financial and reputational. And the hacking of a resident’s home could be perilous.
The technology-driven “sharing economy” also raises a host of thorny issues and questions. For example, if you own property that you use for short-term rentals, is it essentially operating as a hotel? And what are the insurance considerations? What if a guest doesn’t leave when expected and becomes a “holdover resident”? What about the safety of the other guests if someone invited by a short-term resident causes damage or destruction to the property or grounds?
Companies in the multifamily space should adapt and adopt long-term perspectives to not only survive disruptive technology innovations and socioeconomic evolutions, but capitalize on them. Those that fail to do this will face a more difficult future.
Now is the time to prepare. Companies should take steps to embrace new technology, navigate tricky markets, and anticipate demographic changes. Early adopters of change will be better positioned to navigate the complex financial environment and implement strategies to support demographic changes.
The multifamily market will continue to grow and evolve for many years to come. If you haven’t already, now is the time to discuss risk and insurance considerations with your advisors.