SAN DIEGO—For a product type that has been the number one pick of investors for many months, there are two trends emerging that are likely to reshape the multifamily industry once more.

Old To Young

The first is a generational shift from old to young.

There was a tremendous amount of multifamily housing built in the late 1960s and early 1970s to accommodate the Baby Boomers when they first entered the housing market as renters.  Many apartment investors built their portfolios at that time.

Today, these apartment investors are passing these portfolios on to their adult children, fueling an increasing need for investor education and increased portfolio management.

The fact is, real estate investments are inherently illiquid, and long term investments require an understanding of how cities grow and change over time. Multifamily investment advisors must view demographic trends and examine neighborhoods not as static entities, but as ever-changing environments.

For example, Voit is working with a client in San Diego who inherited a number of contiguous older buildings in an exceptional location.  The property, which was originally acquired by a sophisticated investor/developer, was poised for redevelopment, as the surrounding area had substantially improved since its purchase.

The new owner, however, was not interested in developing the property, and was uncertain of the most profitable way to proceed with the investment.

The Voit team advised her that the market for infill development sites was just beginning to rebound from the recession, and recommended that she hold the property for one year to realize its rebounding value.

The client agreed and, after holding the property for an additional year, Voit assisted her in completing a 1031 exchange for a well-located, well-constructed and well-designed apartment complex that only required cosmetic upgrades in order to reposition the asset in the rental market.

Today, the asset is generating a generous cash flow.

As a new generation of investors inherits properties and portfolios, an increased focus on education will be necessary to ensure that these investors can best leverage the dynamics of the markets in which they are investing.

Gen Y Finally Enters The Rental Pool

The second trend reshaping the multifamily market is a direct result of improved market fundamentals. Increased job growth over the past 12 months is contributing to a shift in the behavior of Generation Y renters, who are beginning to make a more pronounced impact on the rental market.  This activity will certainly affect multifamily investors and owners over the next three to five years. 

As employment numbers rise, many Gen Y renters are finally moving out of their parents' homes and establishing households, often for the first time.

In addition, these renters are demonstrating an eclectic taste in the variety of neighborhoods in which they are choosing to live.  The fact is, 20 years ago there was a targeted focus on coastal locations and newer suburban communities.  Today's renters, however, have a more adventurous spirit, and are more willing to pioneer edgier neighborhoods than their generational predecessors.

Two factors driving these tastes are higher transportation costs and a desire to have services and activities in closer physical proximity to housing.  The latter is being driven by a behavioral propensity to spend more on lifestyle, rather than save for a down payment. 

The mentality of Generation Y renters is likely to continue to focus on this more adventurous style of living, and is already contributing to a change in the way new apartment properties are being developed.

For investors, this means that properties in close proximity to local transportation nodes and services will deliver deeper value in the years ahead.

Overall, as the multifamily market continues to shift into its next iteration, it is important for commercial and investment real estate professionals to focus on the big picture for their clients.  By focusing on the dynamics of each market, as opposed relying solely on past and current asset performance, commercial and investment real estate advisors will be able to guide clients not only to their next investment, but to an understanding of how these investments will grow and change over time.

Robert Vallera is a SVP and apartment investment specialist in Voit Real Estate Services' San Diego office. Contact him at [email protected]. The views expressed in this column are the author's own.