Apartment Investors, Operators Expect a Great Year. Here’s Why
Expert insights on the trends that will shape the sector in 2022.
With the darkest days of COVID behind us, apartment investors have reason to be optimistic.
According to a study commissioned by the National Apartment Association and National Multifamily Housing Council and conducted by Hoyt Advisory Services, the U.S. will need to build at least 4.6 million new apartment homes at all price points by 2030.
In addition, as many as 11.7 million older existing apartments could need renovation during the same period. Here are the key trends that will shape new multifamily investment and development in the coming year.
Back to the City
Despite concerns and the extension of work from home for many, big cities are once again attracting renters who crave social interaction, culture and entertainment.
“In Chicago, people have moved back to the city. So as COVID disappears, we’re returning to normal,” explained Craig Pryde AIA, LEED AP, principal, KTGY. “I think there’s still going to be growth in the urban cores, and we’ll see people wanting to move closer to the activities zone. It is definitely still a trend that people are renting well into their 30s before they start thinking about home ownership.”
Meanwhile, suburbanites will also seek the walkable work/live/play lifestyle (also known as the 15-minute city) in surrounding areas as well.
Lending Volumes Rise
The Mortgage Bankers Association anticipates increases in lending volumes in 2022, with activity rising to $597 billion in commercial/multifamily mortgage bankers originations and $421 billion in total multifamily lending.
“Commercial and multifamily real estate markets are moving past the pain that the COVID-19 pandemic caused in 2020,” said Jamie Woodwell, vice president for commercial real estate research, MBA. “There remain significant differences by property type, but incomes have rebounded strongly and investor interest in real estate and real estate finance is robust.”
The result is expected to be strong property appreciation and increased transaction activity, both of which is fueling financings.
“If you look at property fundamentals the vacancy rate is at, or near, lows we haven’t seen since the mid-’80s,” said Woodwell.
Focus on Existing Assets
Factors such as COVID, work from home, migration to the suburbs, the tight labor market, rising construction costs, and supply chain issues all suggest a continued focus on existing multifamily deals.
“Whether big or small, Class A, B or C, the risk is taken down several notches,” said Marty Zupancic, senior vice president of investments at Marcus & Millichap | The Zupancic Group. “I see, in particular, value-add deals, workforce housing and affordable product being super-hot throughout 2022.”
As the economy continues to come back, Zupancic anticipates that Class A and A- product built in the last 10 years will continue to achieve strong pricing.
An Appetite for Redevelopment
“In some cases, these malls were some of the best-located pieces of land within a community that have now become defunct,” said Rick Barrett, founder & CEO of Barrett Lo Visionary Development. “Public-private partnerships between a developer and a municipality can transform these projects into gems of their community.”
Another multifamily redevelopment opportunity that may take off in 2022 involves office buildings that are experiencing increased vacancy.
“You’re buying into a product that already exists and you’re taking lots of risk off the table,” said Zupancic. “I’m also hearing from multiple sources about older or failed hotels that are great for affordable housing. I see that as another adaptive reuse trend.”
According to Yardi Matrix data, a record 20,100 apartment conversions were to be finalized in 2021, and a total of 32,000 in the first two years of the decade. Philadelphia and Washington, D.C., have converted the most units in 2020 and 2021 combined, while Los Angeles and Cleveland have the most projects lined up beginning in 2022.
New Construction Methods
Despite the many potential setbacks facing developers, there are more multifamily units currently under construction than any time since the mid-’70s, according to the MBA, and discussions will widen in 2022 about how multifamily projects are built and which materials work best.
Architectural features that redirect sunlight and lower energy costs will be incorporated into facades. Prefabricated and modular designs can accommodate architectural aesthetics like building offsets, angled walls, balconies, pitched roofs and more. In a well-designed structure, it can be impossible to tell that prefabrication was used.
KTGY has a number of West Coast modular projects under construction and in design including the shipping-container style of modularization. Wood is also well-suited for prefabricated and modular construction because it is lightweight and easily transported, strong, straightforward to engineer, energy-efficient and durable.
“The module has to be a size that can be transported from wherever it’s built to wherever it’s put up on site,” explained Craig Pryde. “That is becoming a real factor in certain markets because the time to finish construction of a structure is definitely shorter.”
Preparing for Next-Gen Renters
It’s never too soon to start researching what the next cohort of apartment renters will want, and 2022 will feature more conversations on this topic.
Generation Alpha (also known as Gen Alpha) is the demographic cohort after Generation Z. Born between the early 2010s and the mid-2020s, Gen Alpha are primarily the children of Millennials. They are the first to be born entirely in the 21st century.
COVID will make apartment residents more aware of the quality of the built environment and cause them to look for apartment homes that protect their wellness. Developers and operators, therefore, will look to programs like LEED, WELL and Fitwel to certify that their projects have physical and mental health in mind. State-of-the-art HVAC and filtration systems plus floorplans that include outdoor terraces and balconies will be in demand.
“Continuing forward, a lot of our units are increasing in size slightly to provide some form of an opportunity to work from home within the unit—that’s providing a space for a desk, a niche or an extension of a countertop,” said Pryde.
Roadmap to Net Zero
In 2022, more investors will make robust efforts toward decarbonization.
“Never before has the real estate industry seen more pressure and more opportunity around net zero,” said Marta Schantz, senior vice president, at ULI Greenprint Center for Building Performance.
ULI recently launched the Net Zero Imperative, a multiyear initiative to accelerate decarbonization in the built environment. The program is designed to help building owners, cities and other relevant constituents reduce carbon emissions.
Residents, too, are seeking apartments that match their values and sustainable goals.
“Take advantage of vacancy during resident turnover to slowly, over time make changes across the units to improve sustainability,” said Schantz.
One wildcard that investors are keeping a watchful eye on, when deciding which markets will yield the greatest return on investment in 2022, is the effect of regional government regulations.
Meanwhile interest rates are expected to rise in 2022. The question is by how much. Still-favorable borrowing rates, combined with an ongoing shortage of single-family homes for sale, however, are expected to create sustained market demand for multifamily units.