The decade following the 2008 recession has marked the “Rise of the Renter”. Today, over…
The decade following the 2008 recession has marked the “Rise of the Renter”. Today, over 100 million people in the United States call a rental unit home, a number that totals 34% of the general population. The trend shows no signs of slowing down: the US needs 4.6 million new apartments by 2030 to meet market demand—a staggering construction rate not achieved since 1989.
To make the most of the burgeoning rental market, owners and managers need to rethink what makes a successful multifamily property: younger generations of renters want more out of their living experience than a place to hang their hat. What makes up the competitive multifamily real estate market, and what trends are driving the growing number of multifamily units in the US?
First, what is a multifamily asset?
Multifamily assets differ from family homes, condominiums, and other housing styles typically owned by one person and serving as home to a single household. Instead, multifamily communities contain five or more dwellings owned by investors, corporations, or real estate investment trusts. These entities then offer rental housing to multiple households. Here’s how analysts break down the market.
There are five main classes of multifamily assets…
Real estate investors divide multifamily investment opportunities into five main tiers to help weigh levels of risk and potential return:
- Class A+: A+ opportunities are the most attractive for institutional investors. Affluent renters gravitate towards Class A+ properties that offer luxury amenities and above-and-beyond white-glove treatment. These properties are typically new construction or ultra high-end renovations of historical buildings. More of a “lifestyle” experience, they offer far more than just the apartment unit itself.
- Class A: This top tier of attractive real estate assets is a solid investment typically located in a major market. They were built within the last ten years or boast recent renovations to keep pace with in-demand amenities. They’re well landscaped, well-merchandised, and offer high-quality construction and attractive common spaces.
- Class B: Constructed within the last 20 years, Class B properties need a little TLC. But with the right attention, they can quickly command market-level rents.
- Class C: Class C properties are riskier investments sensitive to market downturns. Built within the last 30 years, their dated interior and exterior finishes require significant renovations to command higher rents. They’re often located in secondary or tertiary markets and are more affordable to everyday investors.
- Class D: These older properties were constructed more than 30 years ago and harbor significant wear and tear. They’re often located in secondary, tertiary, or fringe markets with little appreciation value.
…with five different common property types
- Single Family Residential (SFR), Townhouse, Multiplex: These styles are most similar to “single-family” living. They might be located in large planned community layouts, but they’re individual units reflective of a traditional house format. Other than being managed at scale (either remotely or on-site), they often feel like single-family homes.
- Walk-up: The favorite metropolitan facade of movie studios, you’ll recognize walk-ups from the background of any film featuring big city living. They’re 4-6 stories with a common main entrance and shared hallways. Tenants “walk up” to their unit in these elevator-free dwellings.
- Garden Style: These one, two, or three-story developments reside in garden-like settings, often managed by an on-site team. Garden-style properties may or may not have elevators and often tout shared amenities like business centers, clubhouses, gyms, or pools.
- Mid-rise: Located in high-density urban areas, mid-rise properties are between 5-12 floors. They feature elevators, and you can often find commercial units on the lower floors. They tend to have on-site management and maintenance, and several common amenity spaces like community rooms or outdoor seating areas.
- High-rise: These multi-story buildings feature a minimum of 9-13 floors with controlled access points, but can shoot straight into the sky for high-class living amongst the clouds. On-site management offers concierge-style service with best-in-class amenities and luxury communal spaces.
Multifamily property types are not limited to these styles. In fact, they can go well beyond what we typically think of as “apartments.” Consider student housing, senior living, or even corporate housing—these property types are also a budding market for real estate investors.
What’s driving the rental growth amongst multifamily properties — and how can property owners ride the wave?
Today, there are 74% more renters than there were in 1960. Over two generations, the real estate market has shifted seismically, from changing tastes to economic collapses and global pandemics. What are the main trends driving rental preferences in 2021?
Economic shifts post-2008 economic collapse
Compared to Baby Boomers, younger generations struggle with higher denial rates for mortgages, loans, and credit cards, barring traditional avenues towards homeownership.
But this doesn’t signal poor financial management: regulatory changes post-2008 delayed credit building opportunities for many millennials, creating a cohort of “credit invisible” Americans. Studies show that one in five Americans isn’t suffering the pitfalls of a poor credit rating but they do not have a credit profile at all.
Combined with a growing preference for debit transactions vs. credit card usage, economic trends create a skyrocketing market for rental properties.
A growing importance of community-building
The 2008 financial collapse created a difficult job market for coming-of-age generations. Excessive student loan debt didn’t instantly fulfill the promise of a high-paying career, setting graduates back financially. For many, the taller, more aggressive corporate ladder has delayed having children by four years. While many economic trends contribute to shifting real estate preferences, generational values have also shaken up the market.
As a multifamily housing owner or operator, you have a leading advantage over the single-family home market. Hint: it’s in the name itself: multifamily community.
Instead of looking for their first family home, Millennials and Gen Z are looking for living situations that encourage close friendships. Vegetable gardens, dog parks, and other vibrant communal spaces are just some ways to bring residents together to build the lasting bonds they crave. Property owners who mind this trend are also boosting renewal rates. Tenants with two friends in the building are 90% more likely to renew, so why not encourage residents to mingle?
A new affinity for experiences, not possessions
Homeownership doesn’t hold the same dreamlike appeal over younger generations like it does with Baby Boomers and beyond. “Goods and services are no longer able to foster economic growth,” writes B. Joseph Pine II and James H. Gilmore in their book The Experience Economy. “To realize revenue growth, the staging of experiences must be pursued as a distinct form of economic output.”
Nearly three-quarters of Millennials value experiences over material things, and lifestyle property owners who stoke the flames of the so-called “experience economy” are winning over affluent millennials. Properties that boast activity planners who organize ping pong competitions, neighborhood bike tours, and artisanal cocktail classes successfully lure younger generations of deep-pocketed renters.
Remote work upends living expectations
Hot markets like New York, Dallas-Fort Worth, and Miami-Fort Lauderdale led the rental growth charts in recent years, but the pandemic has upended what makes a market desirable. Southern locations are experiencing a massive upswing in popularity, creating what some analysts are naming the “Sunbelt Surge.”
Work-from-home mandates created a diaspora of workers no longer needing to clock in at a central HQ. For example, 2020 caused a mass exodus of San Francisco-Bay Area tech workers fleeing exorbitant home prices for more affordable secondary markets like Austin, Phoenix, and Tampa. Investors in these sunny more tax-friendly locales are set to realize significant gains in the shuffle.
Technology is the key to the hearts of renters
New cohorts of renters are bucking the trends of traditionally desirable amenities. Marble countertops and sprawling open kitchens aren’t the most in-demand leasing lures—younger generations want their love of technology folded into every aspect of their lives.
What technologies are topping the charts as the most in-demand amenities? Smart apartments featuring high-speed internet, smart locks and lights, and intelligent thermostats are the digital must-haves renters seek as they explore new cities and seek warm, welcoming communities to call home. Plus, even empty nesters downsizing into rental units are searching for in-home tech: 65% of renters in their 60s and 70s will pay higher premiums for smart apartments. For investors looking to take advantage of the growing rental market, smart tech is a red-hot essential in your portfolio of amenities.
Meeting the demand for 4.6 million new apartments requires a fresh interest from new, enthusiastic investors. Without it, there’s no way of clinching the much-needed goal of more than 325,000 new apartment homes every year. Armed with a solid understanding of these rental trends, property owners, managers, and investors can win this new day in real estate.