Historically, commercial real estate has provided the strongest risk-adjusted returns over other investment products, including stocks and bonds, and the real standout performer among the asset classes, in recent years, has been multifamily. Unlike the office, retail and industrial sectors that rely heavily on job growth to support demand, multifamily demand is largely derived from population growth. Additionally, unlike the other asset classes, multifamily fulfills a fundamental human need: shelter. It’s a utility that is immune to the vagaries of the stock market and the economy, which is why, even at the height of the global financial crisis, overall multifamily occupancies never dipped below 92 percent.
While we have all heard the rallying cry regarding the “resiliency” of the multifamily sector of the real estate market — especially when measured against the displacements of the past 20 years, including the 2001 “dotcom” recession — the aforementioned global financial crisis of 2008-2009; and the overbuilding of class A apartments that reached a 40-year high in 2018, no one could have foreseen the staggering impact of the ensuing COVID-19 pandemic of 2020.
As the ramifications of the pandemic and the shelter-in-place orders that were mandated, closing offices, theaters, fitness centers, restaurants, bars and all but essential retail businesses, the question remained: Would multifamily’s historical resiliency withstand a disruption like no other and could something positive come out of it?
INNOVATE OR FALL BEHIND
A May 2020 report by McKinsey Digital suggested the pandemic accelerated digital adoption five years forward in a matter of just eight weeks. As a result, nimble property operators pivoted and immediately began rethinking and retooling their approach to management and leasing, transitioning from a historically personal one-on-one contact property management and leasing model to a comprehensive proptech approach. The proptech approach called upon optimizing technology platforms to streamline leasing, management and property operations processes.
With onsite property tours at a standstill, development and implementation of virtual property tours through Zoom, Microsoft Teams and FaceTime have become the new normal, and many leases today are being written in the absence of a physical tour. Processing of rent payments through e-payments has streamlined and helped to mitigate slow rental collections, while leveraging expanding existing social media platforms, such as Facebook and Instagram, has become critical.
SAFETY, MULTIFAMILY AND THE SUBURBS
Population migration out of the costlier and more densely populated markets such as New York City, San Francisco and Los Angeles was already occurring pre-pandemic but the shift accelerated dramatically as more companies shifted to a remote working model. Because workers no longer have to live where they work, they have the flexibility to move to areas of the country where housing costs are substantially lower, and quality of life attributes are higher.
Additionally, as social distancing mandates were heightened, renters have vacated the densely populated cities and high-rise apartments for the suburbs in the more affordable secondary and tertiary markets where low-density garden-style apartments abound and offer larger floor plans, individual entranceways and large open green spaces.
Residents simply feel safer outdoors and, thus, multifamily operators are accelerating the repurposing effort to address this shift by replacing dated tennis courts with multipurpose outdoor gaming stations, ping-pong, foosball and cornhole gaming options. While traditional amenities are still in place, the creation of socially distanced outdoor amenities has become a priority.
HOME IS THE NEW OFFICE
According to a recently released Stanford University research report, a whopping 42 percent of the U.S. labor force now works from home full-time and this new “work from home economy” is expected to continue well past the current pandemic. Many large technology companies such as Salesforce, Google and Facebook report the ability to work remotely will continue well into 2021.
This new dynamic will diminish the pre-COVID demand for studio and micro-unit apartments and will accelerate the demand for apartments with larger, more flexible floor plans where units have dedicated workspaces and/or spaces that can double as offices as well as bedrooms.
THE NEXT GENERATION OF RENTERS
While the influence of millennials seemingly dominated the multifamily demand narrative for the past decade, the next generation of renters, Gen Z, is coming of age and will wield as much, if not more, influence on the housing rental market going forward.
According to RENTCafe.com, an estimated 45 million Gen Z-ers will have entered the housing market by 2025, and most of these young adults will be renters.
This new generation was in line to inherit a strong economy with record-breaking unemployment, until the COVID-19 pandemic hit. But despite that, this group was already showing signs of its desire to be fiscally prudent, having grown up during the global financial crisis and in the shadow of millennials who were, and still are, among this country’s lowest wage earners.
Forward-thinking operators recognize that digital initiatives are critical to addressing the desires of Gen Z renters because these digital natives have never known a world without total connectivity and the expectation is that all of their needs can be handled via their smartphones.
This cohort embraces creativity as witnessed by the surge in popularity of online platforms like Tik-Tok and Instagram, and the amenities that appeal to Gen Z, including community-based features that provide opportunities for them to socialize and create (think craft or game rooms, study lounges, community kitchens and outdoor spaces in the form of kitchens, firepits, etc.).
Unlike generations before them, this group is passionate about environmental causes, and those landlords who can demonstrate a similar level of care will stand out. Gen Z considers eco-friendly features as must-have amenities when assessing rental options. A recent study revealed that Gen Z-ers will pay more for sustainable features such as energy-saving appliances, LED lighting, easy recycling services, and paperless renting and property operations. It’s likely this group will assign a higher value to the affordability of their housing and a lower value to square footage or “luxury” amenities.
Although we cannot predict when or what the next displacement to the commercial real estate market will entail, the adaptability of the multifamily sector combined with the continued utility of the asset class as a fundamental need will ensure that its characterization as the most resilient asset class will stand the test of time.
Lisa Robinson is president of Carter Multifamily.