Pandemic Multifamily: Tenant Preferences and Shifting Strategies
Understanding Pandemic Multifamily
This year has presented contradictory messages for multifamily investors. Prevailing wisdom holds that apartments fare well during recessions, but headlines have blared concerns that an eviction wave might permanently damage the sector, or, failing that, that concessions might prove ruinous. No eviction wave has occurred so far, and though rents have declined in urban markets other verticals such as hospitality have still fared worse.
However, the pandemic has changed American life. Shifts away from high-cost coastal cities have created boom conditions in commuter towns and smaller urban centers, creating new conditions and new opportunities. In a typical acquisitions environment, multifamily investors stick to a predefined investment strategy. The ongoing shifts in demographics and the way many conduct work demand a corresponding evolution in multifamily investors’ strategies, involving more scrutiny, analysis, and flexibility than in a typical year.
Appealing to Tenant Needs
No perfect predictions can be made about the pandemic’s long-term impact and the associated shifts in demographics and work culture. However, even if a vaccine like Pfizer’s sees distribution beginning as early as January 2021, the status quo will not return overnight. Many companies have committed to allowing work from home to continue after a vaccine, including tech giants like Facebook and Twitter. Even companies with more traditional work cultures, such as Morgan Stanley, have indicated that their office footprints will shrink in the future.
This shift to working from home has enabled mass departures from places like New York City and San Francisco to suburbs, exurbs, and smaller cities. In New York City, young families have led, making permanent moves to Connecticut, Long Island, and elsewhere earlier than expected. San Franciscans have also decamped, some for hometowns, some for Lake Tahoe, and some for cheaper Californian markets. Though some may return once commuting seems less fraught, urban budget shortfalls caused by decreased tax revenue and acclimation to suburban living will join the increased flexibility of work arrangements to keep some in their new homes.
How do multifamily owners appeal to these tenants? Outdoor space has become more popular, both with those still renting in cities such as New York and those who have left. In Manhattan, apartments with outdoor space command a 5.4% premium over their pre-pandemic prices. In cities, outdoor spaces take the form of terraces or balconies. These do not present an opportunity for much value-add. On the other hand, in suburbs and areas with lesser density, investors can look for assets with underdeveloped acreage. Improvements there can take the form of easy-to-add picnic tables and heaters. Though more expensive and involved, private playgrounds built with social distancing in mind can attract young families uncomfortable with municipal alternatives.
Indoors, units that offer a second bedroom without a premium, or common spaces that can accommodate an office nook or a Peloton will attract tenants more quickly. Given that construction may face hurdles due to safety costs, value-add can come in marketing: a former breakfast alcove touted as perfect for a desk or indoor greenery. Assets with a disproportionate number of small one-bedroom units or studios are best approached with skepticism for now.
Realigning Diligence to Match the Market
Diligence must also undergo reassessment considering the pandemic. A thesis about what will attract tenants has no value if a major local employer goes bankrupt, and normal levels of rent roll scrutiny are not enough.
Understanding a local market will enable the best possible investment decisions. A comprehensive review of local employers and economic prospects will reveal whether the local tenant base can withstand an ongoing pandemic. It may also uncover potential growth prospects as employers rethink leases in major cities, such as a burgeoning tech scene. Another detail to factor is the cost of homeownership. Destinations for those leaving cities have experienced spikes in home costs. Towns with suddenly inflated real estate markets still have the appeal of more space than cities, but for newcomers it will only be readily accessible by renting.
Assets also deserve added scrutiny. Understanding recent leasing trends, existing concessions, and discrepancies between occupancy levels in different unit types can be the decisive factor in a successful acquisition. Disproportionate occupancy of larger units can provide evidence of strong demand from remote office workers. On the other hand, a drop-off in lease activity coupled with higher-than-normal concessions may prove that a market has ceased absorbing new residents. Whatever the case, even non-value add deals may merit a full lease audit to guarantee that tenants can absorb gradual rent increases.
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Whether you need to produce hyperlocal comp sets to understand a new market or want to accelerate the processing of property financials to look at more assets during the pandemic, redIQ can help. Schedule a demo today and see how.