With everyone hunkering down last year, multifamily was a dominant force, without question. Some are even characterizing the multifamily sector as essential real estate in terms of investment strategies.
“That is a perfect characterization,” says Dylan Simon, executive vice president at Kidder Mathews in Seattle. “It is a sign of the maturation and continuation at the top of the market, the most predictable and stable type of investment, and an essential element of daily life. The label is new, but the concept is not.”
Simon points out that in previous recessions, the focus was on “eds and meds” (education and healthcare), while now “beds and sheds” (multifamily and industrial) are the top dogs on the commercial real estate ladder. Eric Paulsen, regional president of brokerage for Kidder Mathews’ Southern California and Southwest offices, agrees that those two product types are leading the charge for the industry.
“We’ve always had strong interest in industrial and apartments, but we’re now seeing a huge influx of investors looking at them as safe investments. That’s compared to office and retail, which due to COVID, have implied much higher risk levels,” Paulsen says.
With that dominant spot in the CRE echelon in mind, other aspects of multifamily are coming to the forefront. For one, landlords are coping quite well with the work-from-home concept and adapting to the needs of the remote worker. In fact, landlords focused on renovating units have reaped the rewards even while offering lower rent prices.
Those upgrades include electrical outlets with USB connections, expanded in-unit workspaces, larger fitness areas, outdoor spaces and amenities such as pet parks or bike storage, and package parcel management. Larger units are also at the top of the renter wish list, but larger isn’t always better in the minds of landlords, says Robin D. Ossenbeck, senior vice president in Kidder Mathews’ West Los Angeles office.
“Larger size units are in more demand as roommates are back and willing to cohabitate again, but working from home is increasing utility and overall maintenance costs for landlords,” Ossenbeck says. “Tenants are looking for upgraded locations with walkable amenities, so walk scores are more important today. In the Los Angeles metro area rents and traffic to properties are now slightly higher than in pre-pandemic times — in some cases net of any concessions for A- and B assets.”
Jordan Carter, executive vice president at Kidder Mathews’ Portland office, agrees that larger units are also getting the most notice further north in Portland.
“Really all property types are doing well in the Portland market, but especially the large two- and three-bedroom units where roommates can rent a big space and split the rent,” he says.
In terms of technology, tenants are looking for stronger, more stable Wi-Fi, converting units to conference rooms with Zoom/video conferencing and electric vehicle charging. A recent example was in Tacoma, WA where the city hosted a successful EV installation program at numerous multifamily properties. Many existing multifamily properties were able to add this as an amenity for EV car residents and the city is footing the bill, according to Brian Richardson, vice president at Kidder Mathews’ Olympia, WA office.
In the broader Puget Sound region, suburban apartment markets were the net benefactors of the flight from urbanism in 2020, but each market performed a bit differently in the past year. As renters were less concerned with commute times, the focus shifted to lifestyles outside of work and minimizing living costs. As such, the more affordable submarkets attracted and retained the most renters.
This led to investors looking for areas with increasing population and workforce, says Paulsen. While it varies by investor, most investors continue to look for newer product (within the last 30 years) to reduce deferred maintenance and obsolete mechanical systems.
“Investors seeking higher cash flow have been moving into B and C markets, while investors looking for a hedge against future inflation have been willing to commit to A markets,” says Richardson.
As for what the future holds for the multifamily sector, the experts agree the future looks bright. Carter echoes the optimistic sentiment by saying the overall market continues to be highly active with interest rates remaining low. He says market fundamentals look strong most everywhere in the country, but especially in the Portland-metro area.
“California exchange buyers largely drive the middle market sales, which has put continued downward pressure on cap rates,” Carter says. “Additionally, with new construction finally slowing down, rent growth has once again started to pick up steam quickly, after being flat for the last couple years.”
At the southern end of the coast in Los Angeles, rental rates are going up, up, up and construction deliveries, vacancy and unemployment are heading the opposite direction. But those downward trending factors, combined with interest rates, are having a positive effect on investor demand for the foreseeable future.
“The future for multifamily investments has never been better with limited land, barriers to entry and record-low interest rates,” says Ossenbeck. “There continues to be a never-ending source of capital pushing to purchase multifamily assets nationwide, pushing up prices, dropping cap rates and forcing longer hold periods for better internal rates of return. I see no lifting of demand going forward.”
Contact
GARY BARAGONA
Director of Research
415.229.8925
gary.baragona@kidder.com