By Taylor Williams
Within the world of multifamily development, the “amenities arms race” has become a well-documented trend over the past decade, a contest to curate and deliver the most appealing combination of entertainment and wellness features and activities to woo prospective renters.
In many instances, this approach was successful, and developers succeeded in capturing the hearts and wallets of renters who sought an “everything under one roof” approach to renting. The fervent movement to deliver more extensive and impressive amenity packages also worked for much of the last decade because interest rates were dirt cheap, even though costs of materials and labor needed to install these features were perpetually on the rise.
But today’s market is different. Developers not only face stubbornly high construction costs, but also significantly higher interest rates. Spreads on construction loans in particular tend to be higher than on permanent loans simply because this phase of the project life cycle carries the most risk. Unlike with other asset classes such as retail and industrial, where preleasing is often a prerequisite to securing construction debt, it’s exceedingly rare for renters to commit to units that are still two-plus years away from being delivered. The absence of leasing activity and cash flows when multifamily construction debt is originated justifies lenders applying a higher spread to the base and all-in interest rates.
A panel of multifamily architects who spoke at the inaugural InterFace Houston Multifamily conference on June 12 delved deeply into renters’ shifting feelings on amenities. The panelists largely couched their arguments with analysis on affordability, as the design techniques and philosophies they employ are often a factor of the budgets their developer clients have to work with.
Affordability Issues
The panelists spoke to trends and requests that they are hearing about and fielding from their developer clients, who are in turn attempting to rethink the amenities components of their projects as they work to stave off higher costs of doing business. These include not only costs of capital and construction, but also heftier insurance policies thanks to wonky Texas weather in recent years, as well as elevated property taxes in a state that must balance its budget without the benefit of income tax.
While the panelists conceded that renters’ preferences and positions on specific amenities can and do vary greatly, almost all renters — and developers — share affordability concerns.
“The amenities arms race has been going on for the last 25 years, getting bigger and bigger,” said panelist Brooks Howell, principal at the Houston office of global architecture firm Gensler. “But tenants are now telling us they want better units and less overall amenities. And if you’re trying to get your pro forma to work, the best way to do that is to cut area out of the project or monetize the amenities. So the amenities we’re looking at are extensions of the living spaces, like small rooms that visitors can rent.”
“We do a lot of boutique condo projects, and in many cases, there are really no amenities at all,” added panelist Todd Blitzer, managing partner at Houston-based architecture firm Mirador Group. “It’s an operating cost that is tied to the homeowners association (HOA) dues that people pay, which can range from 80 cents to $1.50 per square foot. So even for a smaller building, this is a way to reduce costs of construction and overhead once the building is up and operating.”
From the renter’s perspective, the inclusion of fancy amenities has often served as landlords’ justification for annual rent raises. Imbuing fitness centers with full-scale studios for specialized routines like yoga and Pilates, adding cabanas and swim-up bars to pool areas, introducing spaces for boutique activities like podcasting — all these initiatives gave landlords readymade excuses to charge high rents, usage rates notwithstanding.
But there are alternative ways of delivering these types of experiences, which share the common ground of bringing people together, particular for projects in mixed-use settings.
“We do a lot of mixed-use projects, and we have to think about the environment around the project being the actual amenity more so than poker rooms or Nintendo Wi rooms,” said Howell. “Ultimately the mix of uses is the big amenity to the project as opposed to some of the more gimmicky amenities.”
Howell said that Gensler had recently surveyed more than 13,000 people worldwide to obtain insight on attitudes toward amenities. He noted that the quasi-universal concern on affordability constituted “a big epiphany” for the firm.
“It was a surprise for us [to learn this],” Howell said. “We thought we’d hear about [tenants] wanting experiences, but really, they’re trying to figure out how to get their rents down, while developers are trying to figure out how to make deals work. Tenants are asking themselves, ‘How can this be a more affordable unit to rent? Well, we have this giant clubroom and fitness center that we don’t use but are paying for every month.’ People don’t want to pay for extra spaces they don’t use, although some people do use them.”
Multiple panelists stated that as affordability concerns have risen in importance, developers and architects have sought ways to monetize amenities from both renters and third-party members of the public.
“We have a project we just completed called Rowan on the Trails, and we integrated a shop, which was something we proposed at the beginning of the design process,” said panelist Linnea Wingo, senior associate and lead designer at Houston-based architecture firm MaRS Culture. “The developer, McNair [Interests], was on board with that. So we brought in Slowpokes Coffee, and we were able to design the coffee shop so that it served both tenants and the general public and was financially viable for the operator.”
Social Priorities
Wingo’s anecdote on how adding a coffee shop in a multifamily project allayed affordability concerns quickly gave way to analysis on the social engagement factor that the shop provided.
“You can get pretty isolated when you’re working from home, so this [amenity] allowed people to do more than just go down to an empty beverage bar on an amenity deck,” she said. “By going down and interacting with people in the coffee shop, you help create the sense of community for the entire building.”
Autumn Garibay, the moderator of the panel and a renter herself, offered some personal insight on the subject of paying for spaces that she doesn’t use.
“During the pandemic, when everybody started working from home, a lot of that human contact was lost,” said Garibay, whose title is national large loss account manager at SERVPRO Fire & Water Cleanup & Restoration. “Yet we’re still trying to create [a sense of] community in these multifamily projects, and having a good mix of [surrounding] uses is an effective way to do that. I’ve lived in my apartment for more than two years and have been in my clubhouse twice.”
As the pandemic has subsided, renters have demonstrated a preference for getting back out and socializing — enjoying activities that, even with the most adept programming, can’t be replicated at their apartment communities. Scott Ziegler, senior principal at Ziegler Cooper Architects, was among the panelists who pointed this out.
“The fundamental need for socialization exists within all of us,” said Ziegler. “So if we can provide coffee shops in our buildings and be part of a mixed-use community, it does bring people together. We’re working on several placemaking projects that have pocket parks or signature green spaces, and we’re building retail along them to go with the multifamily units, and it creates that European lifestyle that America is finally demanding.”
“People want to be around other people and enjoy interaction,” agreed Blitzer. “So we’re providing amenities that allow for that — bocce ball, pickleball courts, pools, open spaces.”
Blitzer acknowledged that some tenants are inherently more private. Architects can find creative ways to accommodate that segment of the renter population as well, he said.
“At some of our condo projects, we’ve designed private elevators that can take people from their private garages to their private units without seeing anybody else,” he said. “So there’s a broad spectrum of people renting and owning these units, but having those viable options is definitely something people want.”
Ziegler conceded that some developers still prefer to spend more on amenity packages because they see them as key mechanisms in driving leasing and differentiating properties from their competition. The latter point is especially important for owners looking to sell their properties, he explained.
“If you don’t have the amenity checklist, it’s really hard to resell your project,” Ziegler said. “But we are reaching a point in which affordability is the issue, and we have to think of ways to lower operating costs. Whether that’s through designing smaller units or monetizing amenities, that’s a wave that’s coming.”