Tiny Co-Living?

Co-living has been a growing trend in rental housing for a few years now and tiny houses have been a thing for a while now too. Now it looks like tiny co-living is becoming a thing and the Wall Street Journal has the story:

But as the popularity of co-living has grown among young professionals over the past half-decade, the cost of those amenities and spending on new construction have made these living quarters less than cheap. Bedrooms in big cities typically start at more than $1,500 a month, pricing out nearly all except workers making at least $70,000 a year.

A few startups are hoping to change that with rents about half the price, making them affordable to workers in the service sector or artists and other creatives starting out.

Of the several startup companies pursuing this line of business, the one that really caught our eye was this one:

UP(st)ART’s properties are rich with amenities, including recording and photo studios, theaters and free acting, dance and music classes.

UP(st)ART compensates for the added costs by packing residents in like crew members on a cruise ship in 30-square-foot pods. They rent for about $750 a month.

The New Rentonomics

The September issue of Units Magazine has an interesting article about understanding the emerging trends that will affect the apartment industry in the near future. Based on a panel presentation at the 2019 Apartmentalize conference, the article looks at ” who the new renter is, how amenities need to change to meet new renter demand, government involvement and their predictions for the future of renting.” Here’s an excerpt:

“The multifamily housing industry is more dynamic and more diverse than ever before,” said Igor Popov, Ph.D., Chief Economist for Apartment List. “Seniors are entering at 40 percent and high-income renters have been growing at almost 50 percent.”

Adding to that dynamic is that renting no longer carries a negative stigma, says Jennifer Staciokas, Senior Vice President of Marketing, Training and Pricing for Pinnacle. Citing a New York Times article, Millennials like that they rent. It is becoming the option of choice, she said...

Choice and mobility were common themes throughout the conversation with much of the discussion evaluating how the subscription economy plays into both.

“It’s sexy to not own anything and not be tied down to anything,” Staciokas said. “This new generation saw their families lose their housing and clothing. They want it and enjoy it but they don’t want to have to buy it.”

You can read the full article here.

Apartment Industry’s Economic Impact on North Carolina, Triad

The National Apartment Association and National Multifamily Housing Council released updated results from a study they commissioned Hoyt Advisory Services to conduct. Here are the key takeaways for North Carolina:

  • There are 889,200 apartment residents in the state – Spending from North Carolina’s apartment residents contributes $62.5 billion to the local economy each year (including $5.3 billion in taxes), creating 358,000 jobs.
  • There are 517,800 apartment homes in North Carolina – The operation of North Carolina’s apartment homes contributes $3.2billion to the local economy each year (including$799.4 million in property taxes), creating 6,000 jobs.
  • 25% of North Carolina apartments were built before 1980; 41% were built between 1980-1999; 33% were built in year 2000 or later.
  • The renovation and repair of apartments helps preserve North Carolina’s older more affordable units, contributing$1Bto the local economy annually and creating 7,000 jobs.
  • North Carolina needs to build16,000 new apartment homes each year to meet demand. Apartment construction contributes $5 billion to North Carolina’s economy annually, creating 27,000 jobs.

While the Triad’s metro area numbers aren’t included in the report, they do have numbers for each Congressional district and the three districts that include the Triad break down as follows:

NC -5

  • 60,700 apartment residents – Spending from North Carolina 5th’s apartment residents contributes $4.6 billion to the local economy each year (including $392.3 million in taxes), creating 26,000 jobs.
  • 31,800 apartment homes – The operation of North Carolina 5th’s apartment homes contributes$211.8 million to the local economy each year (including$52.4 million in property taxes), creating 424 jobs.
  • 42% of apartments in NC-5 were built before 1980; 38% were built between 1980-1999; 20% were built in year 2000 or later.
  • The renovation and repair of apartments helps preserve North Carolina 5th’s older more affordable units, contributing$90 million to the local economy annually and creating 486 jobs.

NC-6

  • 46,600 apartment residents – Spending from North Carolina 6th’s apartment residents contributes $3.5 billion to the local economy each year (including $297.5 million in taxes), creating 20,000 jobs.
  • 25,600 apartment homes – The operation of North Carolina 6th’s apartment homes contributes $160.6 million to the local economy each year (including $39.7 million in property taxes), creating 322 jobs.
  • 41% of apartments in NC-6 were built before 1980; 41% were built between 1980-1999; 18% were built in year 2000 or later.
  • The renovation and repair of apartments helps preserve North Carolina 6th’s older more affordable units, contributing $68 million to the local economy annually and creating 368 jobs.

NC-13

  • 87,600 apartment residents – Spending from North Carolina 13th’s apartment residents contributes $6.0 billion to the local economy each year (including $509.9 million in taxes), creating 34,000 jobs.
  • 44,200 apartment homes – The operation of North Carolina 13th’s apartment homes contributes $275.4 million to the local economy each year (including $68.1 million in property taxes), creating 551 jobs.
  • 25% of apartments in NC-13 were built before 1980; 48% were built between 1980-1999; 27% were built in year 2000 or later.
  • The renovation and repair of apartments helps preserve North Carolina 13th’s older more affordable units, contributing $117 million to the local economy annually and creating 631 jobs.

Research Shows Mismatch Between Renters’ Searches and Reality

NAA’s Units Magazine has an interesting piece from Apartments.com about some research they’ve done on renters’ searches. Here’s an excerpt:

Searches on Apartments.com indicate renters are usually looking for a deal that may not exist, according to a new analysis of that search data. On average, the typical user searches for a maximum rent that is less than the actual average rent for a given area. In fact, there is roughly a 12 percent premium between average one-bedroom rents and the average maximum rent for which searchers on Apartments.com look. Searchers want the best price—and who can blame them?

Indeed, the more expensive an area is, the more searchers look for lower rental costs. Areas that have average rents between $2,000 and $2,500 have an average premium of real, over searched-for, rents of 22 percent. The premium for areas that average $1,000 to $1,500 is only 8 percent. No area that averages more than $2,500 in one-bedroom rents has renters searching for maximums above the market average.

Furthermore, the overshooting and undershooting of rents correlates to the percentage of income spent on rent. The more expensive an area as a share of income, the less likely a renter is to overshoot rents with their max search. Linear regression predicts that in areas where a renter pays about 25 percent of their income on rent, searchers will plug in a rent that is only 83 percent of the average. At about 11 percent of income spent on rent, they match their max search with the average (Note: These rent-to-income ratios purposely exclude any instance of affordable, discounted, or reimbursed housing).

You can read the full piece here.

The Demographic Trend Apartment Owners Need to Watch

NAA recently interviewed economist Ryan Severino about what he’s seeing in the apartment market, and he had some interesting things to say about the demographic measurements that apartment owners should keep an eye on. Here’s his reply to the question, “What concerns do you have for the apartment market over the next couple of years?”:

Severino: Certainly, affordability is an issue. This is years down the road, but I wonder what happens when Gen Y is not the prime rental cohort anymore. What happens during that change over? Even though we make the blanket assumption that the propensity to rent isn’t going to change, the shrinking of that generational changeover from Gen Y to Gen Z will mean significantly fewer renters during that period, especially if Gen Y starts to transition a little more seriously out of renting into homeownership.

Because of that, I wonder what happens to some of these new apartment communities that are expensive because the land is expensive and material costs are expensive and labor is expensive. What happens to that stuff when you start to get a pullback as a demographic changeover occurs? That’s a little bit further down the road than just the next couple of years, but it’s something that I’ve been thinking about because of demographics.

Read the full interview here.

Apartment Turnover Rate at 20 Year Low

According to a brief published by CBRE and referenced in an article in MultiFamily Executive, national turnover rates for multifamily housing are at their lowest level in the past 20 years. From the article:

A recent brief published by CBRE shows the turnover rate for multifamily housing has fallen to 47.5%, which is the lowest level in two decades. CBRE quotes numbers from RealPage that show a drop of 80 basis points. The decline is confirmed by additional evidence culled from six major real estate investment trusts (REITs). AvalonBay, Camden, Equity Residential (EQR), MAA, and UDR all show a lower turnover rate in Q1 2019 as compared with 2018 with an annual average drop of 2% to 42%. Essex showed a 1-point rise to 41%.

The drop represents an overall trend that has been happening since at least 2000, when the rate was clocked at 65%. According to CBRE, “lower turnover rates are generally interpreted as positives for the industry and a sign of favorable market strength at this point in the cycle.” Turnover ticked up a bit in the mid-2000s but then tumbled again during the Great Recession.

The lowest turnover rates were in the Northeast and Midwest, while the rates in the South and West were higher. Also, rates of turnover were lower in Class B and C properties than in Class A properties.

Enough About the Millennials – Let’s Talk About How Gen Z Will Impact the Apartment Market

Millennials have dominated the attention of the business world for so long that we’ve almost forgotten that there are other markets out there to conquer. (As a member of GenX you don’t want to get me started about how my whole generation was forgotten because we were squeezed between the Baby Boomers and the Millennials). Wouldn’t you know it, the successors to the Millennials, GenZ, are entering the rental housing market in a big way and they are starting to have an impact. Bob Pinnegar, NAA’s CEO, recently wrote about these changes for the Washington Post. Here’s an excerpt:

By 2020, Gen Z will represent 40 percent of all consumers. While most of the business insight into this generation (those born between the mid-1990s and early 2000s) has been focused on its spending habits as teenagers, its oldest members are now graduating college, entering the workforce and seeking apartment homes of their own…

Gen Z has never lived in a world without the Internet or social media. More than any previous generation, it takes for granted the availability of technology. An iPhone isn’t a technological achievement; it’s simply a part of daily life…

Gen Zers’ social media savvy also makes it critical to differentiate marketing and messaging for various channels… Gen Z uses Twitter more often than millennials, and that platform is an ideal way to reach them with real-time, immediate marketing messages such as sales offers and stories about new amenities. Instagram is for inspiration, so compelling images are essential, and Snapchat is perfect for storytelling through images…

Gen Zers were raised by the skeptics of Generation X and grew up during a recession. They are quick to fact-check claims and, as the IBM and NRF report found, “their focus is on quality and authenticity — not on marketing hype.” For property owners and managers, this means actively engaging with residents and taking a transparent approach when providing community information. Negative reviews online are not deleted; they are thoughtfully addressed.

Click here to read the entire article.

“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.