As we enter a new decade, it’s important for apartment owners and operators to understand the current state of the market and where it’s heading.
In July 2019 we officially entered the longest recovery in our country’s history. Interest rates continue to be at historical lows, and there has been an influx of institutional appetite for Class B workforce housing, resulting in cap rate compression.
That said, growth has started to slow and opportunistic investments are hard to come by. In 2020, Class B owners need to be selective and keep their houses in order by securing long-term, fixed-rate debt and continuing to focus on maximizing the renter experience. Here’s how you can capitalize in 2020.
Monitor New Markets
Class B workforce housing will continue to be a hot commodity for institutional investors because of its historical resilience to market recessions compared to other real estate sectors such as retail, office, and hospitality. The increased demand, coupled with low interest rates, should result in continued cap rate compression.
For renters, the demand for affordable, quality living is high. Despite the fact that multifamily properties are being developed in almost every city across the United States, the majority are luxury, urban, Class A developments with rents unattainable to many.
This presents a tremendous opportunity for Class B apartment communities, which tend to be acquired at significant discounts to replacement cost. Even after accounting for rental premiums associated with value-add repositioning, Class B properties are extremely well- positioned since their rents never come close to infringing on those of their Class A peers.
Still, owners looking to invest in Class B multifamily must be selective when considering locations. Look to less- crowded markets with booming job and population growth such as Nashville, the Carolinas, Austin and Kansas City for workforce housing opportunities. Take advantage of today’s debt environment by financing your properties with long-term, fixed-rate mortgages.
Focus on Value-Add, Tech
As new Class A developments continue to saturate the market, Class B apartment owners and managers will need to execute on value-add repositions to compete and retain residents for the long term. The good news is that Class B owners can offer everything today’s renters are looking for — but at a better price.
Common amenities include fitness centers, grilling stations, bocce ball courts, dog parks and dog washing stations, business centers, bike sharing programs, pools, playgrounds and game rooms. Individual units offer hardwood flooring, renovated kitchens and bathrooms, in-unit washers and dryers and more. Your customers have plenty of choices today, so offer something your competitors don’t and whenever possible, buy in bulk to benefit from economies of scale across your portfolio.
If you have not already done so, you must incorporate smart technology into your amenities in 2020. The real estate industry has always been slow to adapt to technology, but renters are now expecting a certain level of convenience in their homes.
Take note of the technology included in new-construction projects and be proactive at your own communities. Consider smart home packages, a trending tech feature which allows renters to control all facets of their home including their lighting, home security, thermostats and more from their smartphone device and an Amazon Echo.
Develop, Retain Employees.
Multifamily is a customer service-based business. In 2020, owners and managers need to continue investing in their employees to ensure the people representing their brand are offering the best service possible to residents. Consider professional development programs, property management trainee initiatives and mentorship opportunities to cater to all experience levels at your company and help them advance their careers.
Aside from training programs, ensure you’re providing competitive benefits and compensation as well as wellness and volunteer activities to encourage a healthy work-life balance and giving back. At Morgan Properties, we also offer various savings to our employees, including the opportunity to live at one of our communities for a discounted price.
Success is a direct result of the people who represent your company. When your employees believe in your mission and are passionate about their work, it creates a positive company culture. By putting your employees first and promoting from within, you’ll likely have employees who stay with you for decades to come. Whether your product is luxury or workforce-oriented, having loyal employees in today’s challenging labor market is a real competitive advantage.
Be Mindful of Regulations
Uncertainties surrounding government policies and the economy are constant in our business, especially as we head into an election year. We’ve been in an extended recovery period, and the key to overcoming today’s slower growth environment is to think outside the box, be selective, maintain strong capital relationships, and be opportunistic within your portfolio. Two topics to closely monitor in the new year include the implications of rent control and regulations impacting Freddie Mac and Fannie Mae.
Despite a few challenges that could affect the market in the upcoming year, the future looks bright for Class B multifamily. Owners and managers who focus on growing markets and providing the best amenities and service at an affordable price will not only find success in 2020, but many years to come.
— By Jason Morgan, principal of metro Philadelphia-based Morgan Properties, the nation’s fifth-largest apartment owner and operator.