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.

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.