The digital transformation of the multifamily industry has been an ongoing process for about a decade, but in the past year the COVID-19 pandemic and a corresponding softening of multifamily economics have added impetus for changes.
Looking at some recent data points from REIS, we can see the vacancy rate for apartments during the third quarter has risen to 5 percent, which is the highest vacancy rate since the first quarter of 2012. Expectations are that vacancies will continue to rise next year. When vacancies rise, generally effective rents decline and that is also happening. Again, according to REIS, in the third quarter the decline was 1.8 percent, the largest drop going back to 1999. All this is due to a spate of new construction over the past decade and unexpected blows delivered by the COVID-19 pandemic: city dwellers deciding to move out of urban apartments to the more spacious suburbs and existing properties becoming more difficult to lease due to social distancing.
Owners and operators of multifamily have had to become more competitive in marketing to new tenants and this includes more than just lowering prices. Apartment communities have to offer more, more, more — especially in terms of technology.
“Price is the number one driver,” observes Patrick Carroll, CEO of Atlanta-based CARROLL. “But prospective residents also want the added technologies and will pay for it if you can show that it is a good value and added convenience.”
Technological inducements have become even more important due to the pandemic, because more people are working from their homes, including apartments. Superior connectivity is essential for people conference calling, staying in touch with key business associates or talking with foreign suppliers.
Tech demands, due to a competitive marketplace and an ongoing pandemic, have now tumbled into what was already a movement in the multifamily space called the “smart apartment,” which is a reference to technologically-enhanced apartment communities and individual homes.
But, and this is an important but: Not all tech changes are about technology. The success of Amazon, for example, meant apartment complexes had to refigure space and security for package delivery. A similar predicament has arisen in terms of services such as DoorDash and Instacart. How can apartment operators provide access and safety for the myriad services that now come right to the consumer’s door? These are issues amplified by the pandemic.
Two years ago, a CBRE survey noted 86 percent of millennials said they were willing to pay more for an apartment equipped with automated or remotely controlled devices. That was so long ago, who remembers 2018? In fact, who remembers the millennials? A more recent survey from RENTCafe notes 62 percent of Generation Z believe apartment technology is extremely important when considering a new apartment.
What does that mean? The smart apartment concept was about two things. First, technology for “smart” thermostats, locks, moisture sensors, etc. This meant tenants could control the heating and cooling of the apartment or even lock or unlock the apartment door from an app on their phones. Going back two years, industry technologists were reporting the technology around smart thermostats, locks, moisture sensors and the like had matured to the point where apartment owners and managers were able to underwrite the cost of deploying the technology on a cost savings basis.
The second part of the smart apartment was the integration of operating systems, such as from Google and Amazon, into the livability of the apartment. For example, using Alexa to lower roller shades if one is sleeping through a hangover or dimming the lights when a special guest is visiting. This is all part of what has been labeled the Internet of Things (IoT) or the network of physical objects embedded with sensors and software for the purpose of connecting and exchanging data with other devices.
New apartment developments were becoming increasingly sophisticated in terms of technology before 2020, and then the pandemic came along and changed the thinking somewhat because so many tenants were working at home that apartment operators had to take that into consideration. Watermark Communities has made “bulk” internet a standard operations technology, meaning the instant a tenant moves in, internet service is provided, as it is at a hotel. Watermark is also blanketing its apartment communities so wi-fi connectivity extends everywhere on the property.
“With COVID, true community wi-fi is more important than ever,” says Clint Garrison, client experience director at Watermark Residential. “If residents are working from home, are on a team call and need to step into the corridor or run down to the lobby to let someone in, they don’t want the call to drop off.” The blanketing would include places such as the fitness center and even the pool area, because in warmer climates residents take their laptops to the pool to work. Everywhere on the property there will be connectivity.
“Having bandwidth and cellular connectivity drives all smart technology and IoT devices,” says Garrison. “The wi-fi and cellular worlds are colliding.”
This all starts before a tenant moves in. In these days of social distancing, apartment tours can be virtual or if one wants to see the physical property before moving in, a self-guided tour can be arranged via smartphone. Then after a person moves in, scan codes are provided for access. Once the tenant is comfortably settled, if a problem comes up, it’s “Hey, Alexa, have a work order sent to fix a dripping faucet.” Is mom visiting? “If you arrive while I’m at work, buzz me when you arrive and I’ll unlock the door.”
Not only is all this smart technology becoming mandatory for apartment owners and operators, it has also become a lot more affordable as compared with three or four years ago. Operators cannot afford to dally on tech-
nology improvements — especially because of COVID, which has pushed concepts such as “touchless” and social distancing.
In 2019, The New York Times reported 90,000 packages disappeared every day in New York City, which is not inconceivable since many older, smaller apartments do not have manned lobbies — or have lobbies at all — and packages piled up at exposed mailboxes. Things are not that bad outside big cities, but already the consumer had been shifting to buying more products online as opposed to visiting a store. This trend line more than two decades in the making was amped up by COVID because of quarantining. Lobbies began to look like Santa’s workshop a week before Christmas and lobby personnel were overwhelmed. So separate rooms and secured lockers have been set up to receive packages. CARROLL has implemented lockers at several locations. The locker company provides the apps so a resident can get notifications, pin codes and access to their packages. Amazon offers its own storage systems, the Amazon Hub Apartment Locker.
Watermark uses two different types of package technologies. Like other operators, it has installed 24-hour, seven-day-a-week accessible package lockers, including Amazon Hub Lockers. The company also, wherever possible, is rolling out a new delivery service called Fetch, which eliminates all package handling at the property. It works this way: A resident will list a local Fetch warehouse as the shipping address and then Fetch, through a mobile app, will schedule a convenient time for residents to get a delivery when they are home. No packages are left out in the cold, in corridors or needed to be handled by apartment staff. No package is at risk because it is only delivered to the customer.
Watermark is using Fetch at two properties and rolling it out at five more. Signing up for Fetch is part of the move-in process. It’s a free service to tenants.
Since food deliveries have increased, some apartments have also installed cold storage lockers for groceries. That leads to the issue of vendors such as a DoorDash and Instacart. Entrepreneurship is budding here as well. Vending Kitchen partners with a group of restaurants that offer a custom menu to residents of an apartment community. Since the menu is specific to an apartment community, deliveries are much quicker.
One other effect of COVID is a reconsideration of what public spaces, both indoor and outdoor, in an apartment community should look like in the future. For indoor, those large conference rooms and clubhouses could be broken down into multiple “gathering” pods for smaller groups.
“When we think about working from home, it would be better to have not just one conference center but several smaller work pods where you can work from home safely and still be within the community,” says Garrison.
As for the outdoors, landscape architects are looking at providing more pocket parks, walking trails, dog parks and increasing the number of gathering places while keeping these areas limited in size.
Finally, and this option is still a bit controversial for apartment owners and operators, there's the idea of including some short-term rentals in the unit mix, closer to the Airbnb model. Watermark is considering five-day rental apartments at one of its more primary locations to be used for work or leisure. More apartment communities are beginning to play in this arena. The bad news is local regulations often make this transition difficult if not possible. On the other hand, the good news is there are a number of third-party partners that would take on the business of managing these short-term rentals.
Although Carroll concedes that if priced correctly, short-term rentals can make sense for both owner and residents, he doesn’t see it as “additive” at this point for his company’s communities.
“This is something that makes more sense in certain markets such as New York City, where there is a more transient population,” he says. “In the sunbelt, I don’t see it as a big factor. It is not a trend for us.”
One solution is a new, emerging asset class being called build-to-rent, which are communities of townhomes, duplexes or very small single-family homes that are built as a rental product rather than a for-sale product. These can be erected as a standalone community or as part of mass community. With three to four bedrooms, this product could fill a need that most multi-story apartment communities cannot.
In the near future, multifamily developments will probably be lumped in four categories: high-rise, mid-rise, garden and built-to-rent.
It’s a bit dizzying out there with a whole new vocabulary of options, build-to-rent, Internet of Things, smart apartments, blanketed wi-fi, etc., but that all means progress is at hand and that’s where any business, including real estate, needs to be.
Steve Bergsman is a freelance writer based in Mesa, Ariz.