Nearly 50 million workers switched last year from an office environment to work-from-home (WFH), allowing large parts of the U.S. economy to continue functioning despite social distancing requirements during the pandemic. As other sectors began to recover from the shutdowns last year, however, large numbers of workers remained at home, causing some concerns about possible longer-term impacts of WFH on the markets for office commercial real estate. Despite some twists and turns due to the Delta variant, the most recent news suggests the return-to-office (RTO) is rebounding.
The RTO began as the economy started to reopen, and proceeded through much of last year. 16 million workers had returned to the office by October 2020, a one-third decline in WFH in six months. Being back in the office has always been contingent on progress in bringing the pandemic under control, however, and the surge in COVID cases late last year brought about a partial reversal in RTO in November and December.
Fortunately, RTO regained momentum earlier this year as tens of millions of Americans received vaccinations against the coronavirus. By July 2021, the number of people working from home had declined nearly 60% from its peak in May 2020. (I discussed the progress in RTO in an earlier Forbes article in July 2021).
More recently, there has been both good news and bad news about the return to the office. First, the bad news: The surge in COVID infections beginning in mid-July due to the Delta variant has had a significant negative impact on labor markets. Job growth slowed, with monthly increases in payroll employment falling by 70%, from an average of more than 700,000 per month from February through July to averaging 280,000 in August and September.
RTO hit a speed bump as well. The number of employees working from home increased nearly 400,000 in August and was little changed in September. This setback was not as large as the reversal that occurred last winter but nevertheless has pushed back the timetable for a more complete return to the office.
Demand for single-family rental homes is showing no sign of easing up, and that is pushing rents through the roof, especially for the highest-priced properties.
As a result, investors are now flooding into the market again, after falling back a bit during the first year of the Covid pandemic.
Nationally, rents rose 9.3% in August, year over year, up from a 2.2% year-over-year increase in August 2020, according to CoreLogic.
For the first time since before the pandemic hit, all major metropolitan housing markets covered by CoreLogic showed positive rent growth. Miami led the way with a 21% gain, followed by Phoenix at 19% and Las Vegas at 15%.
“Converging economic trends are driving a surge in single-family rent prices, and consumer confidence has driven an uptick in demand for both renters and buyers,” Molly Boesel, an economist at CoreLogic, said in a release. “The ongoing preference toward more living space — and slim for-sale inventory — is forcing would-be buyers back into renting, putting significant strain on the single-family rental market.”
The gains have investors rushing to buy and build more rental properties. In the past year, there were roughly 43 announcements totaling more than $30 billion in capital targeting U.S. rental housing, according to tracking by John Burns Real Estate Consulting.
“Since some of this is only the equity investment and excludes the debt, and we know of far more than this that is not public info, the real number is much higher,” wrote Danielle Nguyen, senior manager, research at JBREC in a release.
Nguyen cites several reasons for the investor demand:
Worldwide bond yields are at historic lows, and investors need yield.
Inflation is on the rise, and most investors view rental homes as an inflation hedge.
Record high rent growth is supported by high occupancy rates.
Renters have demonstrated that they are willing to pay a premium to rent in a new home neighborhood managed by a professional landlord.
That last point is supported by rent growth according to price tier. Lower-priced rentals, (75% or less than the regional median) rose 7.1% in August year over year, up from 2.4% in August 2020. Higher-priced rentals (125% or more than the regional median) climbed 10.5%, up from 2.3% in August 2020, according to CoreLogic.
Even as overall home sales fell back slightly in August, investors made up a larger share of sales than in August of 2020, according to the National Association of Realtors. Meanwhile, first-time homebuyers, who historically make up about 40% of sales, were at just 29%, the lowest level in more than a decade. Home prices continue to rise sharply, weakening affordability but bolstering demand for rentals.
To protect against inflation, big investors are trading the value-add model for a core investment strategy.
This year, inflation has become a top concern for investors. Institutional capital and major funds are planning ahead by shifting from a value-add or short-term hold investment strategy to a long-term hold business model.
“On a short-term hold, it is very difficult to make any meaningful money when the cap rates are so low. You are only going to see revenue increasing with inflation, you have to hold the property for a long time to see growth,” Jahn Brodwin, a senior managing director in the real estate practice at FTI Consulting, tells GlobeSt.com.
At the center of the longer-term strategy is long-term debt, usually at 10 years. Because the value of the dollar decreases with inflation, investors with long-term debt are paying the loan off with cheaper money. “If you can secure 10-year money with a fixed rate when you are at year seven, eight, and nine, you are paying back debt with cheap dollars,” says Brodwin. “If you can lock in long-term low-interest rates followed by a period of inflation, while rents are climbing at inflationary rates, your debt is staying flat.”
The multifamily market is a perfect asset class for this strategy because the rent structure also provides a hedge against inflation. “Multifamily is great inflation protection because they re-price every year,” says Brodwin. “So, if there is an extended period of inflation, multifamily becomes a good inflation hedge, compared to office or retail with longer-term leases.”
Apartments are also historically resilient during times of economic dislocation. “The one thing that we know for sure is that people need a place to live,” adds Brodwin. “So, multifamily has always been viewed as a safe bet. In exchange for the safe bet, you have to be willing to accept a lower return.”
While institutions are holding onto assets for longer, they aren’t necessarily changing to a core or core-plus strategy. “Clearly, there are many funds that are in the buy-fix-sell mode, but there is a lot of money looking for a home,” says Brodwin. “Capital is focused on buying assets that provide inflation protection. It is a safe bet, and when you have all of this uncertainty surrounding other asset classes, there is a flight to safety.”
Institutions are securing long-term debt at low-interest rates as quickly as possible, while rates are still low. Many experts have visions of rising rates in the future. “We are in a historically low-interest-rate environment. The expectation is that this isn’t going to last for very much longer,” says Brodwin. “There is less and less purpose to keeping interest rates artificially low.”
Regardless of the type or location of owned or managed property, every apartment industry company is confronting the same primary headwinds.
At the top of the list of challenges is the recruitment and retention of staff. Almost three-quarters of housing providers deem this one of their top three challenges, underscoring the pandemic’s impact on long-term sustainability and growth.
These are among the major findings of a National Apartment Association (NAA) survey conducted in July of 1,000 respondents, of which 30.6 percent were from companies with 500 or fewer units.
“No matter what region and what role you play in your company, recruitment and retention were the biggest challenges,” Paula Munger, associate vice president of industry research and analytics at NAA, told Multi-Housing News.
“The demand for apartments now has resulted in more companies needing to hire,” she continued. “They are having to offer signing bonuses, it’s super competitive. It’s hard to make your offer stand out if you don’t offer competitive pay, a competitive benefits package, and flexibility, which is crucially important these days.”
The second most commonly seen challenge by respondents was the need for operational efficiencies, Munger said. Respondents were asked to rank the operational tasks regarded most daunting. Finding high-quality vendors represented the number one challenge. The second was freeing up team members from labor-intensive processes and the third reducing costs. NAA learned from other surveys costs rose last year during the pandemic.
After the need for operational efficiencies, the third most commonly seen challenge was lost rent, more severely impacting smaller companies, she added.
“We did ask them what they were doing to solve for these problems now, and what they needed,” Munger said.
“They are offering sign-on bonuses, increased pay, enhanced benefits and they are using recruiters. What they still need are policies supportive of increasing labor pools, and certainly more industry training in high schools, colleges and trade schools. There are many positions in this industry that don’t require a college education.
“They are also looking to create programs that promote the industry to attract workers. There is a lot of churn in the industry. We need to see the labor pool open up, and one way to do that is to advertise the industry and all the benefits it offers.”
The ultimate takeaway from the survey? “This really underscores how hard the pandemic hit the industry last year,” Munger said. “There remain a lot of operators that continue to be impacted and are still in recovery.”
“The staff cares about me” is the thing most important to renters when deciding on where to sign a lease.”
After two years of rapid change and uncertainty, residents are paying attention now more than ever to the care and trustworthiness of management companies, according to a recent report from J Turner Research.
The report was delivered on Tuesday during the session “Marketing Matters – How Good Behavior is Rewarded in the Market” at the Apartment Innovation and Marketing Conference in Huntington Beach, Calif.
Joseph Batdorf, President at J Turner Research; and Chelsea Kneeland, Director of Research & Development at J Turner Research, discussed the results of the survey “Internet Adventure Study III,” which included responses from 2,257 residents nationwide. That group was represented by 64 percent females and 33 percent males; overall, their average age was 40.32 years old.
Most telling, from the report, is that when asked, “What’s most important to you when selecting an apartment to rent?” Fifty-five percent of renters said, “The apartment staff cares about me.”
They Read All the Reviews
All reviews are read by 64 percent of renters who are searching, with 5-star and 1-star being most viewed at 14% and 13%, respectively.
The age of the review posting can play an important role, however, the survey showed that 64 percent of residents deem a review that was dated 2 years ago or longer is irrelevant.
The survey showed that if a community had low ratings overall, but had been showing improvement in more recent review posts, 78% of renters said they would “somewhat likely to very likely” consider the property.
ORA score A Decisive Factor
Renters preferred checking reviews from at least two different review sites to validate authenticity instead of relying on one site for an accurate depiction.
J Turner Research calculates an Online Reputation Assessment (ORA™) score for communities. The ORA™ statistical model aggregates and analyzes online ratings and reviews of over 122,000 properties across multiple review sites and ILSs to generate a single score on a 0-100 scale.
When renters have presented the choice between two properties with a 10-point variance in the ORA score, they chose the higher-rated community 65 percent of the time. If both choices’ ORA score was below the national average, they chose neither.
Response Should Come Within 72 Hours
Renters posting negative reviews on a site said they are willing to wait up to 72 hours for a lengthy response that provides a solution rather than a quick response of acknowledgment of receiving the review.
Twenty percent of renters begin looking for an apartment when about three months is left on their lease. However, the percentage who begin looking a year or more early is 15%, meaning “apartment communities more than ever have to start working on their reputation management skills about as soon as the renter moves in,” Batdorf said.
WASHINGTON, D.C. — The Federal Housing Finance Agency (FHFA) has set the 2022 multifamily loan purchase caps for Fannie Mae and Freddie Mac to be $78 billion for each agency for a combined total of $156 billion. The 2022 caps are based on FHFA’s projections of the overall growth of the multifamily originations market. This year the caps are set at $70 billion a piece for both Fannie Mae and Freddie Mac.
The FHFA wants the agencies to keep their focus on providing liquidity for affordable housing and underserved markets. Just like this year, the organization is requiring that at least 50 percent of Fannie Mae’s and Freddie Mac’s multifamily business in 2022 to be mission-driven affordable housing, or for units affordable to residents earning 80 percent of area median income (AMI). However, at least 25 percent of the agencies’ multifamily business is required to be affordable to residents at or below 60 percent of AMI, up from the 20 percent required this year.
Additionally, the FHFA is expanding certain definitions of what it determines as “mission-driven affordable housing.” Starting next year, the FHFA will allow loans on affordable units in cost-burdened renter markets and loans to finance energy or water efficiency improvements for units affordable at or below 60 percent of AMI to now be classified as “mission-driven.”
“The increases of the multifamily loan purchase caps and higher mission-driven business requirements assure that the enterprises’ multifamily businesses have a strong and growing commitment to affordable housing finance, particularly for residents and communities that are the most difficult to serve,” says Sandra Thompson, acting director of the FHFA.
Real Estate Alert (REA) released rankings for the first half of the calendar year 2021 with Marcus & Millichap as the #1 firm for the sale of Multifamily properties valued at $5M to $25M.
During the first half of 2021, Marcus & Millichap’s Multi-Housing Division seized on the opportunity to leverage the firm’s vast network and qualified buyer pool to effectively move capital and deliver top-notch returns for our clients. Our investment specialists’ expertise coupled with real-time market insight allowed us to lead the apartment sector in the $5M to $25M segment, demonstrating our continued commitment to thriving in the current market.
As the oldest Millennials are approaching 40, their needs are changing. Because they have different factors influencing their needs than they did in their 20s and 30s, Millennial renters’ preferences have shifted considerably.
Today’s Millennials are renting for longer periods than previous generations. They are delaying plans to get married and start families. But even when entering these different stages of life, a good portion of this demographic prefers to rent, compared to earlier generations who were already buying their first home at that stage.
And while some can’t afford to buy, others enjoy the flexibility that renting offers. JP Bacariza, vice president & market leader for Ryan Cos.’ Tampa office, said larger, three-bedroom units and single-family rentals have become a popular option for Millennials who want to avoid the commitment of homeownership.
The COVID-19 pandemic forced Millennial office workers to shift to remote working and changed the way they utilize space. Compared to 10 years ago, when renters were trekking to the office every day, today they need space to comfortably work from home.
A Millennial who would have been content with a one-bedroom unit is now looking for a two-bedroom apartment, with the functionality of the space equally important as the square footage.
“With Millennials working from home, they need to be able to conduct Zoom calls and not have major distractions or disruptions,” said Bekkah Doyle, senior marketing specialist with REACH by RENTCafé at Yardi.
The option to work outside their apartment is a major selling point. According to Bacariza, Millennials expect to see decentralized office space for remote work on the list of property amenities. To meet this need, many communities are providing membership-based office space for rent, either through the community or through a partnership with a coworking provider.
At 2Hopkins, a 21-story, 183-unit community in Baltimore, Md., operator LIVEbe Communities moved away from the traditional business center model that was common 10 years ago and replaced it with cubbies and banquettes. Residents have separation for privacy, but they can also interact with other residents.
“They really appreciate those areas, where they can get comfortable and know that they don’t have to go somewhere (else) to access those types of spaces,” said Elaine De Lude, vice president at LIVEbe.
Shifting space needs
Outdoor space is another important consideration for Millennial renters, who are more cognizant of their mental health and well-being.
“They want to be outdoors more; they want fresh air, nature, and natural light,” said Richard Lake, managing partner of Roadside Development.
Rooftop spaces, outdoor pavilions, pool decks with cabanas, green spaces, and communal spaces with a firepit or other focal point are newer amenities that have become necessary comforts.
With the rise of e-commerce and grocery delivery services, package lockers and cold storage are a necessity that was less prevalent 10 years ago.
Millennials want to live in a community with a long amenity list. Amenities used to be clustered in one area of a property, but today’s Millennials want to live differently, according to Lake.
“Sometimes they want the energy and excitement of other people, and other times they just want to sit on the roof and have a glass of wine while watching the sunset with their dog,” said Lake.
With many in this demographic owning pets, they are also looking for properties with dog parks, dog runs, and pet spas.
Roadside’s City Ridge, a mixed-use, 750-unit development in Washington, D.C., will feature several amenities across the community to cater to this generation’s lifestyle, including a rooftop greenhouse with an organic garden, a maker space, a commercial kitchen, and an outdoor pizza oven.
These “more soulful and more intimate amenities are just as important as creating those wow moments,” said Lake.
When it comes to fitness and physical health, the Millennial renter is looking beyond the traditional fitness centers. Developers have had to expand offerings from just one on-site gym to include a yoga room, a TRX training room, or another secondary fitness space, something Bacariza said is hugely important today.
A subset of the amenity list includes those with a built-in social element that supplies a community feel. Theater rooms are now less appealing and are being replaced with options that create more of a social scene, such as game and recreational areas, wine bars or regular events that are executed in a social setting.
“These environments enrich people’s lives and create bonds between the residents,” said Bacariza.
Connection and engagement are more important to this generation, but this should be an authentic experience. You need to show how your community fosters that.
“It’s not enough to say you provide excellent customer service. Millennials are asking ‘What does that look like? Show us … let us feel it,’” De Lude noted.
To retain your Millennial residents, you need to be relatable.
“Being transparent is really key,” said RENTCafé’s Doyle, “as Millennials are very self-sufficient in finding out more information about your business than just what you are putting out there.”
This demographic is savvy enough to call your bluff when you describe your average pool as “resort-style.”
Show and tech
Convenience is also high on the Millennial checklist. As a tech-forward demographic, they want convenience, accessibility, and the ability to do things on their own.
To that point, “our buildings have to get smarter,” said Lake.
Millennials use technology to find apartments, so they expect communities to utilize technology in various ways, whether it’s self-guided or virtual touring, smart locks or smart thermostats. Wi-Fi connectivity is also a must-have.
“Millennials are the smartphone generation, so as many things as we can access and control from our smartphones the better,” said Doyle.
As a connected generation that no longer writes checks and has ditched bank transfers in favor of mobile-based options, Millennials would prefer using an app to pay their rent and make maintenance requests.
Technology is also an important element of marketing to Millennials and communicating with them. This generation would rather communicate by text message than call the management office.
“The Millennials expect to be followed up within that manner,” De Lude said. “That expectation is a change in behavior from 10 years ago.”
Rising home prices and interest rates will decrease housing affordability even further in the months ahead, predicts National Association of Home Builders Chief Economist Robert Dietz.
In a recent NAHB newsletter, Dietz said his outlook comes as home prices have risen more than 30%, on average nationwide since the start of 2020. A year ago, 43% of new home sales were priced below $300,000. In August, the share fell to 30%.
New homes are 24% lower than a year ago because of higher construction costs and some limiting of sales.
“While higher prices have slowed resale housing demand, inventory struggles continue to limit sales volume and encourage more home construction,” Dietz said.
He bases his prediction of continuing declining affordability not only on rising prices but also in the belief interest rates will rise as the Federal Reserve tightens monetary policy.
“Indeed, the 10-year Treasury rate has increased 37 basis points since the start of August. And consumer confidence declined to a seven-month low in September because of virus and inflation concerns. The prospect of higher taxes is certainly having a negative impact as well,” Dietz pointed out.
He cautioned builders will need to watch resale inventory in local markets to gauge how higher prices and rates are affecting available demand.
Dietz noted the surge in single-family construction at the end of last year means that for the first time since 2013, there are now more single-family homes currently under construction than individual apartments.
But year-to-date multifamily starts are up almost 17% on a year-to-date basis thus far in 2021 as a rebound for the rental market has taken hold while single-family starts were down 2.8% for the month.
While higher prices have slowed resale housing demand, inventory struggles continue to limit sales volume (and encourage more home construction). Unsold inventory stands at just a 2.6-month.
NAHB is not alone in its assessment.
In the summer, Frank Martell, president, and CEO of CoreLogic predicted price rises would continue in 2021 and could very well push prospective buyers out of the market in many areas and slow home price growth over the next year.