Multifamily’s New Toolbox

This summer real estate software company AppFolio introduced Lisa, a digital assistant designed to take potential apartment tenants through initial questions they might have about a particular apartment or property.  Because it was built using conversational artificial intelligence, Lisa can carry on a simple text-based conversation in real time, not only answering questions but also asking them in order to vet the prospects. It is, to state the obvious, an immense time saver for brokers and property owners. “The immediacy of responses that Lisa provides helps meet prospect expectations and gives time back to leasing agents and property management businesses to focus more on business strategy,” says Elliott Burris, VP at AppFolio.

Lisa, though, is more than a convenience—it also is representative of the great strides apartment tech has made over the last year or so. Perhaps more to the point, Lisa also symbolizes the growing number of tools that multifamily owners now have at their disposal. These tools are not limited to just technology, however. There have been a number of changes, ranging from investment focus to new thinking about demographics to changes in design, that have come online that are changing the way apartment owners and developers conduct business and manage operating expenses.

Apartments, of course, are among the top-performing asset classes; hardly—it would seem—in need of such improvements. Emerging trends, though, may change that narrative as the cycle nears its end. Some product types, such as luxury development, are not so easy to pencil anymore. Fannie Mae and Freddie Mac are undergoing change as the Trump Administration pushes for their privatization. Affordable housing has become a big focus, not only by developers interested in this product type, but also by voters who are irate about rising rental rates. Already, the resulting rent control measures that are being put in place around the country are starting to have wider ramifications.

For example, earlier this year Gebroe-Hammer Associates closed a $75-million North Jersey portfolio sale of 487 units spanning the state’s most densely populated counties of Hudson and Bergen counties. The seller was Madison Hill Properties and the buyer was a private investor. Gebroe-Hammer also arranged the $58.5-million sale of New Providence Gardens, a 232-unit garden-apartment community located within one of the most affluent corners of the state.

“With the recent passing of onerous rent control legislation in New York, we expect to see an onslaught of investor demand in New Jersey shifting from across the Hudson River to out-commuter-dense submarkets,” says Ken Uranowitz, president of Gebroe-Hammer. “In turn, this will create an even wider delta where there is an already constrained demand/supply imbalance, which will intensify pricing pressure and deepen cap-rate compression.”

None of this, however, is to say that multifamily is in danger of losing its favored status.

Gebroe-Hammer Associates, for instance, expects continued strong activity for the remainder of this year in the multifamily market due in part to solid market fundamentals. According to the firm, which arranges deals on behalf of a diverse client base of private individuals, private equity firms and institutional investors, investor confidence remains very high as brand new apartment-property deliveries top off this year and apartment-fundamental pressure eases. Those kinds of conditions “will only feed rent growth and property appreciation over the next five to 10 years and beyond, based on forecasted demographic patterns,” Uranowitz says.

All that said, multifamily companies still see the need to embrace new solutions and concepts that will better support their margins.

Tech’s Growing Role

The most notable of these is technology. AppFolio’s Lisa illustrates the direct impact such products can have on a company’s bottom line. Another example is MyCoop Technologies, a property management software provider that focuses on smaller buildings that are run by mom and pops or individuals and that do not have onsite management and maintenance staff. In such properties, “Residents are pretty much left to their own devices,” says Alex Norman, the co-founder and CEO of the proptech startup. “Communications are left to periodic emails or paper posted in foyers, in the elevators or slipped underneath your door in your apartment.” And Norman says that’s not enough, especially when things go wrong, such as when there’s a problem with the heat or a flood or hurricane hits. In January 2018, Norman and his college friend, Kristi Prigmore, invested $300,000 in starting MyCoop, based in New York City. Together they created a cloud-based online software platform that handles basic residential building communications.

Diana Pittro, EVP at RMK Management, says that technology is one of the biggest opportunities in property management but notes that it is also one of the industry’s biggest challenges when it comes to delivering personalized customer service. “While some aspects of tenant relations can be managed quickly and effectively by utilizing technology, the key is striking the right balance with impersonal technology and face-to-face interaction.”

She adds that “Technology allows us to make great strides in customer service via mobile device apps that can ease the stress of day-to-day life by managing package deliveries, scheduling maintenance, delivering routine communications, and submitting online bill payments.”

In fact, she points out that with the exception of customer service, almost every task—accounting, lease management, processing work orders, rental payments, package delivery, concierge services, housekeeping services, access systems—is automated via mobile devices and website portals.

Design That Differentiates

Another new tool at developers’ disposal is new thinking around multifamily design. Consider Mary Cook, founder and president of commercial interior design firm Mary Cook Associates, who uses psychographics to influence design of multifamily properties in an attempt to differentiate their projects.

She explains that multifamily developers are increasingly including show-stopping amenities like boxing rings, pet spas and recording studios at their communities in the well-known “amenities arms race” trend. The strategy makes sense, she says, as today’s residents expect their communities to have a full amenity package.

A recent study from the National Multifamily Housing Council, for example, said that tenants are willing to pay more rent for certain community amenities. “However, industry insiders report that many of these amenities—even on-site theaters and club houses—are underutilized,” Cook explains. “And that not only affects a developer’s bottom line, but it might also impact the very success of the project.”

That’s where psychographics comes in, she continues. “Psychographics, the quantitative study of consumers’ attitudes and interests, is quickly becoming a disrupter in real estate.” It helps to guide developers toward the amenities their target audience will actually use.

“Unlike demographics, psychographics gives developers the ability to dig down into consumer values, opinions, attitudes, lifestyle and interests, with the ultimate goal to provide the kind of spaces tenants want—and to help ensure the project is a profitable one,” she says.

As an example, Toll Brothers Apartment Living embraced Cook’s application of psychographics at its Parc at Princeton Junction project in Princeton, NJ, which is home to many international renters who work in the nearby biomedical industry. During the design process, cultural lifestyle considerations were kept in mind, says Cook.

For example, her team selected non-permeable textiles and materials for a chef’s kitchen in the amenity lounge in order to stand up to different international cooking styles that use oils in high heat. And, for residents with children, there are conference rooms configured to double as homework areas or study suites for Kumon learning, a common cultural method of studying, she adds.

A Focus on Affordable Housing

Another development that has been gaining traction is the realization that affordable housing can diversity a portfolio. According to a recent 2019 Mid-Year Powerhouse Poll by Berkadia, which surveyed Berkadia’s investment sales brokers and mortgage bankers across 60 offices, 84% agree that affordable housing will have a major impact on the industry in the next year—especially as regulations around Opportunity Zones solidify.

“The buzz around a growing need for affordable housing has been building for years but escalated this spring when the US Department of the Treasury announced the second set of Opportunity Zone regulations,” says Ernie Katai, EVP and head of Production at Berkadia.

“As individuals and families in metros and suburbs across the country continue to struggle with rising rent costs, investors are no longer focused solely on class A housing,” he continued. “Many are diversifying their portfolios by adding affordable properties to the mix.”

And a huge demand is showing for workforce housing, which is generally defined as housing targeted at individuals earning between 60% and 120% of a region’s average median income, explains Elie Rieder, CEO and founder of Castle Lanterra Properties. Rieder says that consumer demand for apartments at these properties is extremely high.

“Millennials are renting their homes, as opposed to owning them, at the highest rate of any recent generation, while a growing number of Baby Boomers are downsizing from single-family homes to apartments as they approach their retirement years,” she says. “At the same time, while there’s been a good deal of new multifamily development this cycle, the bulk of it has been either luxury apartments or government-subsidized affordable housing; there has been minimal construction of market-rate workforce housing.”

According to Rieder, with nearly half of renter households currently rent-burdened—where more than 30% of their paycheck goes toward housing costs—the explosion of luxury development will do little to meet the growing consumer demand for apartments. “In the workforce housing space, the supply/demand imbalance has led to shrinking vacancies and growing rents in recent years. As the cycle progresses and some investors anticipate the market souring, the stability of workforce housing is extremely appealing.”

An additional element that makes workforce housing an attractive investment option, Rieder says, is the fact that much of the country’s housing stock is aging, which opens up the opportunity to create value through capital improvements.

Castle Lanterra’s approach is not just to acquire workforce housing properties, but to enhance them with modern amenities and other capital improvements, which Rieder says elevates living standards for residents while generating strong returns for its investors.

“Because people generally look for homes that provide access to job opportunities, employment growth and population growth are closely linked. In light of this, it’s not surprising that the markets with significant investor interest in multifamily properties are generally the ones with the most favorable outlooks.”

Castle Laterra also considers the dynamics of municipal governments. “Local governments that invest in highways, mass transit and other infrastructure support business growth, and thereby increase the potential of local apartment communities. A municipal or state government’s approach to taxes, education and economic development can have a profound impact on the area’s attractiveness to residents and businesses, both of which will impact the multifamily market,” Rieder says.

Regions that check most of these boxes include the metropolitan areas surrounding Seattle, Orlando, Boston, Denver, the NY/NJ/Connecticut Tri-State area, Atlanta, Boston and Austin. The mid-Atlantic region is also worthy of note. The company acquired a property in suburban Virginia recently and is actively looking to expand its holdings in Washington DC, suburban Maryland and suburban Virginia.

Capital Flows Freely for Multifamily Construction

When Scott Meredith of George Smith Partners recently secured a $67.3 million construction loan for the development of a 254-unit 14-story multifamily property in Phoenix, he had his pick of possible lenders.

“The market is diverse,” Meredith, an SVP at George Smith Partners, says. “It is not just big money center banks or life companies looking for class-A deals in gateway cities. It isn’t that confined. It is a more varied appetite from the capital markets with everything from high net worth individuals entering the construction lending space to insurance companies and money center banks and everything in between. The beauty of this capital markets today is that there is capital for a broad range of transactions.”

The ample capital for construction deals is a new trend, Meredith explained. During the recession, certainly, lenders were not active in the market. However, just a few years ago, lenders were still skeptical. “At the bottom of the recession, this would not be the case,” says Meredith. “Four years ago, for example, I worked on a ground-up multifamily deal in Phoenix around the corner from this project, and that was a challenge. Phoenix had a reputation as a boom-bust city, and some lenders had been hurt by that. Today, we had much more open minds and those lenders are willing to go back.”