The multifamily real estate sector is booming. Over the last decade, more than 2 million units were constructed in apartment buildings across the country; and 370,942 more are expected in 2020—a 50% increase over 2019. The trend that’s driving this construction growth is a massive increase in the popularity of renting: Since 2000, the population of renters in cities across the U.S. has climbed by an average of 31%.
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What does this mean for property managers? This record-breaking demand for rentals creates undeniable opportunities for investors, as well as a heightened need for professionals equipped to face the challenges that come with larger buildings.
In this post, we’ll talk about five trends that will shape the multifamily rental industry in 2020, starting at the 30,000-foot view, then drilling down to actionable advice on how property managers can lease new buildings faster and retain residents over time.
Multifamily Trend #1: The fastest-growing rental markets are in the Sun Belt and the suburbs.
In early 2014, a TIME headline declared: “The new American Dream is living in a city, not owning a house in the suburbs.” The years before had seen an unprecedented ramp-up in multifamily construction as the Great Recession came to an end. Layoffs and foreclosures created an appetite for stability, driving Americans toward the concentration of jobs and rentals downtown.
By that point, however, this trend was already on the downswing. Large cities saw a sharp drop-off in population growth starting in the mid-2010s as the cost of living reached record-breaking highs. For many outgoing residents, it wasn’t that they no longer wanted to live in downtown neighborhoods—they simply couldn’t afford to. Whereas the average Manhattan renter was paying $3,110 for their home in 2011, in 2016, they were paying $5,160—that’s 66% more in just five years. Across the U.S., multifamily rents grew by 38.9% between 2009 and 2019.
Across the U.S., multifamily rents grew by 38.9% between 2009 and 2019.
The most recent Census data shows that this trend only deepened in the second half of the decade. Residents have flocked to cities with promising job growth and a good quality of life at an affordable cost, as prices in primary markets have jumped out of residents’ reach. On the whole, large Snow Belt cities like New York and Chicago are shrinking; and instead, growth has shifted to the suburbs of Sun Belt cities. Between 2010 and 2018, the five cities that received the most new residents were Dallas, Houston, Phoenix, Atlanta, and Miami.
Growth isn’t only happening downtown—it’s also spreading to nearby suburbs and satellite cities, which are quickly becoming younger and more diverse than they’ve been in the past. In 2020, some cities in the orbit of major metros are expected to outperform their larger counterparts, like Fort Worth and Arlington outside of Dallas, and Chandler and Gilbert outside of Phoenix. CBRE projects that suburban multifamily rentals will be investors’ best bet in 2020, with lower vacancy rates and faster rent growth than urban buildings.
Why is growth moving to the suburbs? Both renters and prospective homebuyers are finding that they’re able to get more for their money out in the suburbs—and they may not have to sacrifice the walkability that drives many Americans to live downtown. Mixed-use developments in the outer ring of major cities are gaining popularity among residents of all ages, giving them convenient access to local businesses, restaurants, and other places of interest.
Learn more about the cities that we predict will be a smart investment in the year ahead: Buildium’s Up-and-Coming Cities List: 100 Real Estate Markets to Watch in 2020
Multifamily Trend #2: High rates of multifamily construction aren’t making a dent in the housing shortage.
More than 2 million multifamily units have been built over the last decade, and the pace of deliveries won’t slow in 2020. In fact, the 370,942 new units expected this year represent a 50% increase over 2019. 31% of these units will be in multifamily buildings with 20 or more units, mostly located in urban and suburban neighborhoods. Tens of thousands of new units will be delivered to the Sun Belt metros that residents flocked to in the second half of the decade, including Dallas/Fort Worth, Atlanta, Seattle, and Phoenix; as well as primary markets like Los Angeles, Washington D.C., Boston, and New York City.
Building thousands of new units in the country’s most prominent and fastest-growing cities seems like it would be the perfect antidote to the housing shortage. But there’s a catch: A full 80% of the multifamily units expected to be completed in 2020 will be luxury rentals.
Why is construction focusing on rentals that a majority of Americans can’t afford? Basically, high construction costs mean that rents have to be high to make new multifamily housing projects worthwhile for developers and investors. Overall, construction costs have risen by an average of 5.3% each year since 2016. This is for several reasons: The speed at which new units can be built is constrained by labor shortages; zoning restrictions make multifamily housing permits expensive and difficult to come by in many cities; and rising materials and land costs make building more expensive.
80% of the multifamily units expected to be completed in 2020 will be luxury rentals.
Because these costs don’t vary much between cities, the incentive is for developers to focus on building in pricier neighborhoods in cities where job growth, demographic trends, and rent growth guarantee they’ll make their money back. In addition, developers have focused on multifamily housing projects because building more units on a smaller footprint is more profitable, particularly in downtown neighborhoods with astronomical land prices. Unfortunately, these buildings’ desirable locations and amenities result in prices that only a handful of renters can afford: Today, 1 in 5 new units rents for at least $2,450 a month.
For many cities, this means that rental market conditions can vary widely by neighborhood, or even by building. It’s basic economics: Vacancy rates and concessions may spike in one area due to a surplus of Class A properties in the face of weak demand. Meanwhile, strong demand for a limited supply of workforce housing is driving rents and occupancy rates to record highs.
Multifamily Trend #3: High-income households are the fastest-growing renter segment, but they don’t represent a majority of renters.
The number of affluent “renters by choice” has skyrocketed in recent years. Between 2010 and 2018, this demographic of renters grew by 45%; and today, affluent renters comprise more than 1 in 5 renter households. In response, there’s been a surge in the construction of Class A multifamily properties, which are more profitable for developers than other property types. These amenity-rich buildings are designed to cater to residents who rent for the flexible, convenient lifestyle it provides, rather than out of financial necessity.
Here’s the problem with the recent focus on high-income renters: Though they might be the fastest-growing renter segment, they’re far from the majority. In reality, 62% of renters earn a middle-class income—which also represents a profound change in renter demographics over time. After the housing market crashed in 2009, there was a surge in middle-income renters that has never truly abated, thanks to low wage gains, high home prices, and strained inventory.
40% of renters across 46 states are considered cost-burdened.
This means that it’s important for property managers and investors not to get distracted by the so-called “amenities war” between high-end apartment buildings competing for a limited supply of affluent renters. 80% of renter households aren’t considered high-income; instead, 40% of renters across 46 states are considered cost-burdened, spending more than a third of their income on rent each month.
So, what is the average renter looking for in an apartment building? According to Buildium’s research, by huge margins, renters would choose a neighborhood that’s safe and convenient over one that’s fun and lively or scenic. They would choose a building with un-glamorous amenities like garbage pick-up, a laundry room, and parking over one with trendy add-ons like communal spaces for resident events and co-working. They would much rather have a washer and dryer, a dishwasher, or air conditioning in their units than smart home technology.
And what renters want most of all is simple: a place where they can feel at home, at a price that they can afford.
Multifamily Trend #4: Today’s renters are more diverse than ever before, requiring property managers to rethink their retention strategy regularly.
In 2010, the average renter was a single person with a high school education earning less than $30,000 per year. In contrast, the average renter household today is a college-educated married couple.
Renter households have also changed in other ways: The number of middle-aged and senior renters has increased, though renters in their twenties and thirties are still in the majority. The number of Americans living alone has increased, though many who might prefer to live alone simply can’t afford to. Families are increasingly renting their homes, supported by the construction of family-sized rentals. 1 in 3 adults live in ‘doubled up’ arrangements, a trend that began with young adults moving into relatives’ homes during the Great Recession, and is now driven by parents moving in with adult children.
What does this mean? Renters of all ages need units that accommodate a range of household types—couples, kids, singles, pets, roommates, seniors, and everything in between. As a larger and more diverse population rents their homes, the apartments and property managers of the future will need to be increasingly flexible to meet renters’ evolving needs over time.
37% of residents in large apartment buildings plan on moving out at the end of their lease.
What makes this challenge even more urgent for property managers is that retaining multifamily residents can take extra effort in comparison with other rental types: According to Buildium’s research, 37% of residents in large apartment buildings planned on moving out at the end of their lease, in comparison with 25% of single-family residents and 23% of renters living in duplexes or triplexes.
Here’s some advice for multifamily property managers on meeting the needs of diverse renter demographics in 2020.
Residents of all ages are attracted to buildings in walkable neighborhoods with amenities that make their lives easier. This is particularly true for the growing number of Millennials and Baby Boomers who choose to rent to avoid the expense and effort of maintaining a home over time. Providing services like cleaning and pet-sitting can be a smart way to make renters’ lives easier—we’ll talk more about how these offerings can drive retention and revenue in the next section.
Residents’ units will need to evolve with them as they age. As younger residents grow their families and Baby Boomers age while living in apartment buildings, their rentals may need to be updated to be more accessible or child-friendly. Consider making updates to units that retain residents and increase properties’ appeal; or, alternatively, working with renters to find a unit that better suits their changing needs.
Nearly half of renters wish they were homeowners but can’t afford to save for a down payment, including 41% of multifamily residents surveyed by Buildium. However, several of residents’ biggest complaints about renting are concerns that property managers can address with some creative thinking: 52% wish they had the ability to customize their rental; 49% would like private outdoor space; 40% need more space in their unit; 38% wish they lived in an apartment with a different layout; 34% need more space to park; 31% want the ability to own a pet; 29% wish their landlord were more responsive; and 28% don’t like their neighbors.
Tech-enabled rental processes are a must for multifamily renters. Even more than other renters, residents of large apartment buildings expect that they can do it all online, from paying their rent to filing maintenance requests. According to Buildium’s research, 2 in 3 multifamily renters would like to have access to a resident portal. Even better, residents of all generations appreciate these technologies: Though Baby Boomers are least comfortable with technology, 53% want to pay rent online; 45% want to use a resident portal; and 38% would like to file maintenance requests online.
Multifamily Trend #5: Renters’ desire to save time, live healthy, and reduce their carbon footprint opens up money-making opportunities for property managers.
Flashy amenities might catch a prospective renter’s eye, but they may not have time to take advantage of rooftop pools and fire pits once they’ve moved in. Which amenities will renters not only use on a regular basis, but will also increase renewal rates and generate revenue for property managers?
Services: Whether your residents are working professionals or retirees, everyone is looking for ways to reduce stress and save time for the activities they care about most. Multifamily Insiders recommends that buildings offer lifestyle services that cater to residents’ needs, and has found that residents who sign up for at least two services renew at a rate of 81.4%. Property managers can partner with vendors to provide services like dry-cleaning, house cleaning, dog-walking, and pet-sitting at rates that generate additional revenue. (Side note: Spending on pet care services has doubled over the last 10 years, and more than 50% of multifamily renters surveyed by Buildium would choose a building that allows pets over one that doesn’t.)
Fitness: People of all ages are thinking about their health more than in the past. 55% of multifamily renters told Buildium that they’d give preference to an apartment building with a fitness center; and the most-wanted offerings are exercise machines, free weights, and weight machines. 2 in 5 renters would participate in fitness or yoga classes in their apartment building; and bringing in instructors to host classes on-site can also present revenue opportunities for multifamily property managers.
Soundproofing: When it comes to mental health, soundproofing can go a long way in helping residents enjoy the time they spend in their rental. 94% of renters would be interested in soundproofed walls, and 49% of multifamily renters surveyed by Buildium say that soundproofing would influence their choice of one rental over another. Soundproof walls can make property managers’ lives easier by reducing complaints about neighbors, and could potentially increase renewal rates as well.
Sustainability: Many residents would prefer to live in a ‘green’ building, both out of concern for the environment and a desire to cut down their utility bills. 26% of multifamily renters told Buildium that a building’s eco-friendliness would influence their choice of one apartment over another. 79% of renters would be interested in a building recycling program, and 31% would choose a rental that allowed them to recycle or compost over one that didn’t. 63% of renters would be interested in a building with on-site renewable energy, such as solar power.
Residents who sign up for at least two lifestyle services renew at a rate of 81%.
Rental demand has never been higher; but as the amount of multifamily housing rises sharply in cities across the country, apartment buildings face steep competition. Don’t get caught up in the amenities war—remember that you choose the experience you create for your residents in the building that they call home, and this has a big impact on their decision to stay in the long-term.
Above all else, being a high-performing property manager in multifamily today requires a thoughtful blend of responsiveness, empathy, and technology. Consider infusing technology into rental processes like showings, lease signing, rent collection, communications, and maintenance ticketing. This can free up time in your schedule that can be reinvested into higher-order concerns, like improving the quality of interactions you have with residents, and increasing the personalization of services you provide. The key is to use technology to reinforce the importance of relationships to your business, rather than to allow it to replace the human touch.Read more on Industry Intel