“Workforce” Apartments Gaining Investors’ Interest

High-end apartments have attracted most investment dollars during the almost 10-year bull run that began at the end of the Great Recession, but now more affordable units are getting attention from investors. From the Wall Street Journal:

A venture led by Prudential Financial Inc. is spending nearly $600 million for 4,000 housing units aimed at lower-income workers, the latest sign that investors see bigger gains in lower-rent apartments than in the upscale ones that have led the recovery.

These so-called workforce housing units usually are in older buildings that cater to price-conscious renters, paying about $1,000 a month for a one-bedroom unit. Around 6.3 million units, or about 41% of all the rental apartments in the U.S., fall into the workforce category, according to CoStar Group Inc., which tracks buildings that are five units and greater…

Workforce housing rents are increasing at a faster rate than upscale units because of high demand and the dearth of new supply. Meanwhile, most of the 100,000 units that become obsolete annually fall into the workforce and affordable category, according to a report set to be released by commercial real-estate-services firm CBRE Group Inc. later this week.

Mr. Munk, of PGIM, pointed out that investing in relatively small improvements to workforce housing units —like a new carpet or a washer and dryer—can produce a big payoff in a higher rent. “If we can spend $10,000 to improve a particular unit, that could potentially bring in $200 a month more in rent,” he said.

Labor Shortage a Challenge for Apartment Developers

Nationwide there is still ample demand for new apartments, but a shortage in construction labor is limiting the number of units being delivered. From an article on Realtor.com:

Rising construction costs and a tight labor market are slowing a nearly decade long apartment boom, likely easing a burgeoning glut at the top end of the market that has been forming across the U.S.

Multifamily building permits have fallen each month since March, according to federal data. That type of slowdown suggests there should be less new apartment construction over the next two years, the typical time it takes to build an apartment property of any scale…

“The demand is there,” said Paula Munger, the National Apartment Association’s director of industry research and analysis, referring to tenants. “But labor’s a big deal. It varies by position, but in general that’s what we’re hearing from our members. The actual completions are being more and more delayed for that reason.”

One silver lining from the delayed construction is that it will help reduce some of the inventory at the high end of the market, which has seen the most activity over the last few years and reverse the recent slow down in rent growth.

One-Off or Early Signs of a Trend?

Those of us who were around pre-Great Recession can remember a time when it was relatively commonplace for apartment communities to be converted to condos. Then the mother of all recessions happened and rental housing became the most lucrative, and safest, real estate game in town and we stopped seeing those conversions – if anything we saw condos converting to rental units.

That’s what makes the news of this move in Winston-Salem pretty interesting. From a story in the Triad Business Journal:

Winston-Salem investors Ben Bloodworth and Taylor Williams purchased the 836 Oak Street Lofts apartments in downtown Winston-Salem for $2.75 million with plans to convert the 26 apartments in the former mill facility into condos.

The purchase included 1.22 undeveloped acres adjacent to the apartments.

Bloodworth told Triad Business Journal that all current leases would be honored, and the units would be upfitted and sold as the leases expire.

Downtown Winston-Salem is experiencing a boom of new housing, retail, restaurants and entertainment with the growth of the Wake Forest Innovation Quarter, including the Bailey Power Plant, and the office renovation projects at the GMAC tower.

Downtown Winston-Salem is a particularly hot market in the Triad right now, so this might portend a larger trend across the region, but it will be interesting to see if other investors follow suit, especially in the downtown markets of the Triad’s cities.

Key Takeaways from NAA’s Income & Expense Survey

The National Apartment Association recently published the results of their 2018 Income & Expense Survey, and offered some key takeaways in an Executive Summary:

  • Operating expenses increased by 2.1 percent, the slowest rate of growth since 2013.
  • Net Operating Income (NOI) grew by 5.8 percent, up 2 percentage points over 2016, impressive amid slowing rent growth.
  • Increases in payroll expenses were in line with wage growth in other private sector industries, averaging 2.4 percent.
  • The number of market-rent garden-style units per full-time employee increased for the third consecutive year to 44.3. The challenges of an ongoing labor shortage within the industry likely kept some communities understaffed throughout the year. Increased pressures on wages can be expected in 2018 and should be evident in next year’s survey results.
  • Once again, property taxes were responsible for the largest increase in expenses, up 5.3 percent year-over-year. The average property tax bill was $1,833 per unit and represented one-third of expenses. Fifteen years ago, property taxes comprised less than one-quarter of operating outlays. Contesting assessed values has become commonplace for many owners feeling the squeeze from skyrocketing taxes.

Click here to read the full Executive Summary and click here to order a copy of the survey results, which provide breakdowns for each metro market.

Gender Disparity in Multifamily Leadership

Multifamily Executive has an in-depth article about gender disparity in the executive ranks of the multifamily industry. It’s worth a full read, but here are some highlights:

In a study commissioned by MFE, executive compensation research firm Equilar found that women are shut out of the boards of directors of four of the country’s top 16 multifamily REITs: Blue Rock, BRT Apartments, NexPoint Residential Trust, and Preferred Apartment Communities. The analysis also found that women account for 17.2% of all board members, slightly below the Equilar 500 average of 20.9% female and just above the Russell 3000 average of 16%.

A dive into the 16 REITs’ SEC filings reveals that females are more sparsely represented as named executive officers (NEOs), or the companies’ most highly compensated officers—11 of the 16 had no female NEOs. The same four REITs that have no women on their boards also have no female NEOs…

In addition, while women make almost as much as men when they start out in commercial real estate, their compensation falls well below their peers once they hit 40 and approach the C-suite. Overall, the industry median annual compensation is $115,000 for women and $150,000 for men, CREW found.

So what are the chances that significant progress will be made on gender equity in multifamily? Pretty good once the Boomers start retiring:

“We’ve made a modicum of progress,” says CREW CEO Wendy Mann. “And we still have a long way to go. Really.” She believes transformation is imminent, however, as baby boomers retire in the next five to 10 years, creating “a great departure in male leadership.” She predicts “a huge groundswell of women now in their late 40s and early 50s” will step into the void, pushing companies closer to parity. “Do I think it will be 50–50?” she says. “Maybe not. But I think we’ll see a difference.”

Jobs, Jobs, Jobs

It would surprise no one to learn that there’s a tight job market in the rental housing world, but you might be surprised at exactly how many open positions there are in the industry. According to new research from the National Apartment Association, there are about 4,000 open positions nationwide. The largest number of open positions can be found in the “Property Management” category, and not far behind that is the “Maintenance Category.”

Source: National Apartment Association

As you can see the largest number of openings by job title is for Maintenance Technicians – shocking right? – and the researchers were kind enough to dig a little deeper into that position’s data:

Source: National Apartment Association

All of this data is derived from a new monthly NAAEI product called Apartment Jobs Snapshot. Here’s more info about it from NAA’s site:

The Apartment Jobs Snapshot is a new monthly product from NAAEI highlighting labor force trends in the rental housing industry. It examines the total job posting trends by position, category and geography, as well as providing fresh and detailed updates for industry employers. The snapshot will feature enhanced quarterly editions with more expansive data, starting in April 2018.

Players Entering the Short-Term Rental Field

Last week we shared an article about the effect that Airbnb is potentially having on rents. This week we’ve found an item about potential new players in the short-term rental market, and their interest in working with property management firms. From the Wall Street Journal:

The short-term residential rental business, which got its start with people putting spare rooms on the lodging market, is knocking on the door of some of the country’s largest landlords.

A venture-capital group that includes hotelier Barry Sternlicht has invested in a startup that plans to add a new upscale and branded dimension to the short-term rental business pioneered by companies like Airbnb Inc. and HomeAway Inc…

“Consumers want short-term rentals and they want them at a scale that no one ever anticipated,” said Fifth Wall co-founder Brendan Wallace.

Numerous other startups are pushing into similar businesses, including Arlington, Va.-based WhyHotel and YouRent.com of Miami. Meanwhile, Airbnb in 2016 launched its own “Friendly Buildings Program” under which landlords put rental units on the website.

An Airbnb spokesman last week said there were 13,000 units in the program, up from 10,000 in July.

Many landlords are still skeptical about working with these companies, but that could change as property management firms become more familiar with the new short-term companies. And of course, if vacancies begin to rise then working with these firms could become a much more enticing option.

Over 19,000 Apartments Needed to Meet Housing Demands in Piedmont Triad

The National Apartment Association (NAA) and National Multifamily Housing Council (NMHC) recently commissioned a study by Hoyt Advisory Services on the housing market in the Piedmont Triad and concluded that almost 19,000 new apartment units will need to be constructed by 2030 in order to meet the region’s housing needs. The study also found that this new construction will require all types of apartments at all price points.

The study found that the Piedmont Triad currently has an estimated 101,020 apartments with residents of all ages and income levels. Of those units, 66% were built before the year 2000, which is a key factor in addressing housing affordability; as new housing units are built they free up older housing stock for workforce housing.

While multiple factors contribute to the need for new apartments, including shifting lifestyle preferences, such as delayed homebuying, as well as the aging American population, a critical component to increased demand for all housing in the Triad is an influx of 25,000 new residents from other parts of the country.

Here’s a link to a PDF version of an overview of the study results for the Triad. Metro MF Overview Piedmont Triad 3-Nov-17

You can also find results at the weareapartments.org website.

 

Alexa: What’s the latest apartment amenity?

The newest thing in luxury apartment living is “Alexa Everywhere” as highlighted in this Wall Street Journal article:

New York developer Tishman Speyer is making a bet on voice-activated smart-home devices at each of the 1,871 apartments there, in what it sees as a blueprint for the future of rental housing…

In the 120 apartments in the “Penthouse Collection,” which consists of luxury units on the top four floors at Jackson Park, home-automation features will be built directly into outlets, light switches and a smart thermostat that could be used to raise and lower the heat or air conditioning through word commands…

The smart appliances would be connected through a hub to Amazon.com ’s Echo Show, a device with a video screen, activated by calling out to “Alexa.”…

The other apartments, now on the market, will get a scaled-down version with the Echo Show and an outlet that can plug into an existing receptacle and be used to turn on a coffee maker or a lamp. Renters would be able to add features as well.

The article goes on to point out that the “smart home” devices might currently focus on managing the lights and appliances, but in the near future they could incorporate information on services provided by the property manager – office hours, dates and times of upcoming events, reserving space at the gym, etc. – or even services and events in the surrounding area.

While this is confined to the extreme high end right now – the penthouses in Jackson Park rent for $10,000 a month – this is something that is likely to become an expectation at most market rate communities for  increasingly tech dependant renters.

U.S. Apartment Construction Set to Decline Despite Continued Demand

Apartment construction continues to steam along, but it is set to decline despite a continued demand for more units in cities across the US. From the Wall Street Journal:

Overall U.S. housing starts declined for the fourth time in five months in July, the Commerce Department reported Wednesday. Total housing starts decreased 4.8% from the previous month to a seasonally adjusted annual rate of 1.155 million.

While starts edged 0.5% lower for single-family construction, they plummeted 17.1% for construction on buildings with five or more units. Apartment construction is tapering off because of an oversupply of units, especially at the top end of the market that is causing rents to flatten in many major cities.

“I’m optimistic that single-family will catch up,“ Mr. McLaughlin said. ”It’s not going to happen this year and it’s probably not going to happen next year.”

There are immediate consequences to a pullback in multifamily buildings if single-family doesn’t immediately catch up. It could exacerbate a shortage of homes. While there is a surplus of luxury apartments in most major metropolitan areas, housing overall remains scarce.

A question not addressed in the article: where are all the construction workers going to come from to build those single family homes?