Here’s what to expect across the industry as we head toward year-end.

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As we hit the halfway mark of 2024, multifamily experts across design, development, investment and finance weigh in on the dynamics impacting outcomes for the remainder of the year. As the apartment industry “stays alive until 2205,” here’s what they’ll be focusing on.

1. Smaller amenity spaces with more to offer

As developers seek to maximize the number of units they can include at a property, they are encroaching on common areas. But that doesn’t mean amenities are any less of a focus.

“Conservative trends in amenity footprint are becoming prevalent, as developers increasingly opt to add more units by reducing the overall square footage allocated to amenities,” said Jennifer Harpe, principal at Hord Coplan Macht. “This shift is largely driven by escalating pressures on financing and construction costs, necessitating a meticulous examination of every square inch in development proformas.”

And spatial variety is a consideration for both shared spaces and units as residents seek to maximize their space.

Some developers are rethinking shared areas, merging their indoor and outdoor spaces with the addition of “three-season spaces.” These can include porches, overhangs or trellised zones adjacent to indoor spaces, said Harpe. Meanwhile, an increased focus on wellness has meant amenities like spa services, salt and sauna rooms and cold plunge pools, as well as bespoke fitness offerings.

2. Location and amenities as investment drivers

Suburban and garden-style apartment communities, especially those in highly rated school districts, remain among the most attractive properties for investors, Allan Swaringen, president & CEO of JLL Income Property Trust, told MHN. Strong barriers to new supply and onsite and local amenities are also major plusses.

“Our school district strategy has allowed us to build a geographically diverse portfolio of 26 apartment communities in16 different states and 17 different markets,” said Swaringen. “These more mature infill locations tend to have higher tenant retention, allow for above market rent growth and create local market barriers to new construction of higher density housing. “

3. An uptick in transaction volume

Multifamily transactions could see an increase in the second half of the year, but the optimistic outlook comes with calls for caution.

“While rent and vacancy forecasts vary by market based on supply (and) demand dynamics, transaction volume should pick up” for acquisitions, said Steven Buchwald, senior managing director at IPA Capital Markets.

This could be spurred on by price normalization and, perhaps, one interest rate cuts by the Federal Reserve. There may also be an increase in the number of construction projects due to declining labor costs.

Buchwald expects lending to still be primarily driven by debt funds in the near term for non-stabilized assets and spreads to continue to compress, as multifamily is still the most favored asset class by lenders and their warehouse line providers.

“Plenty of subordinate debt has been raised and is waiting on the sidelines for rescue situations and note sales, but there is a possibility that the distress never fully comes to fruition in many markets and much of the capital is eventually repurposed back to LP investments as cap rates stabilize, hard costs normalize and transaction yields once again make sense,” he observed.

4. More defense than offense

While rate cuts are expected to bolster the market, a lot of activity in the nearer term will be generated by assets whose loans are coming due and on distressed properties, noted Drake Ayres, managing director at Sabal Investment Holdings.

“Stabilized multifamily transaction activity is expected to remain light through year-end and into the first half of 2025,” said Ayres. “We do expect to see some velocity gain in lock step with interest rate cuts, when those occur. Until then, a great deal of new issuance loan activity will center around pending maturities as well as distressed asset sales. Well capitalized borrowers are also likely to remain more interested in shorter-term bridge financing options in this current environment, even if those loans come at a higher rate.”

5. Less-crowded market

“A trend that is already here is pulling together additional and creative capital to fill the gap created by debt lenders pulling back on their advance rates,” Christopher Coleman, vice president of development at Wingspan Development Group, told MHN. Wingspan has built an in-house equity platform of investors.

Despite the withdrawal of traditional investors, those who do decided to dive in this year will have a unique opportunity to benefit from the current landscape, Coleman said: “These investor partners see the same opportunities we do in today’s market and understand that this is a unique window in which to launch great developments that will deliver into an environment with limited competition.”

Michael Green, CEO & founding partner at Virtú Investments, agreed that opportunities abound for the right type of buyer. “The later part of the year is shaping into what we see as a brief window of opportunity to acquire institutional-quality multifamily assets well below replacement cost, for the groups that have capital to deploy,” he said. “Pricing expectations of buyers and sellers finally seem to be meeting again but institutional investors haven’t yet come back to the table in a meaningful way.”

However, for credit-worthy buyers who can access debt and have cash on hand, the second half could turn out to be “the best buying window we’ve seen for multifamily in premier markets” since the post-Great Financial Crisis, said Green.

6. Senior demographics will spur consolidations

Aging is accelerating, with over 8,000 seniors a day turning 80, Jay Wagner, senior managing director and co-lead of JLL’s Capital Markets Seniors Housing platform, told MHN. Meanwhile, there is a continued slowdown in new construction for senior housing.

“These elements are going to drive continued strengthening in the operating fundamentals of the business with industry-wide occupancy expected to exceed pre-Covid occupancy by Q4 of this year,” said Wagner. “This dynamic will continue to drive expanded margins and we are looking at another year of high single digit rent growth.”

The lack of supply and demographic shift has led to heightened investor interest in senior housing, both at the property and platform level. “Taken in whole, we expect to see an acceleration in transaction volume as we move through the balance of ’24 and into 2025,” said Wagner, who predicts continued consolidation of senior housing operators over the next two years. This will include the emergence of “several new super regional platforms” resulting from consolidation.

7. Tech’s role in insuring properties

Insurance, often regarded as a staid and sober sector, may be getting much more interesting as it pertains to multifamily. Rising costs and coverage challenges are a major reason why, according to James Stuart, Chief Sales Officer & Practice Leader for global insurance brokerage Hub International’s real estate specialty in North America.

Multifamily insurance costs are rising, translating into higher rents for residents and added financial strain on property owners who are unable to raise rents. “Larger liability verdicts are costing owners and tenants more much more premium in litigious states,” said Stuart.

Meanwhile, limited coverage coupled with higher deductibles could prove a recipe for disaster. “In some states, insurers are offering less comprehensive coverage while raising deductibles, making it harder for property owners to recoup losses in the event of a claim,” Stuart noted. In California, for instance, insurers are pulling out entirely, leaving state insurance the only option. Banks, which will want their collateral covered, could impose force-placed insurance on their lenders to protect their assets.

Tech-driven risk mitigation is shaping up to be the wave of the future in insurance, Stuart noted. “Insurers are placing more emphasis on properties that implement smart technologies or preventative measures to reduce risks like water damage or fires,” he told MHN. “This could translate to lower premiums for properties with such features.” In the future, insurers are likely to increase their utilization of data analytics to assess specific risks, including fire risk, leading to more customized premiums based on an asset’s specific risk profile.

8. Oversupply in construction boom markets

In certain markets where developers have been active and projects are going online at a rapid pace, there may be more product debuting than would be ideal from an investor standpoint.

“We are approaching peak deliveries in several markets,” noted Rob Goldstein, portfolio manager at CenterSquare. “This may lead to an oversupply of buildings in lease-up, intensifying competition during the traditionally slower fall and winter months.”

While the market is expected to work through inventories in the long-term, the near-term could be trickier. “While the supply picture will improve meaningfully in the coming years, we caution the market to anticipate some turbulence between now and then.”

9. More targeted marketing campaigns

In a response to the challenging economic climate for owners and a desire for more community engagement, property managers may be looking to partner with local organizations via targeted marketing partnerships.

“Innovative property management firms are strategically engaging with the community through unique and targeted marketing campaigns,” said Laura Khouri, president of Western National Property Management, which has teamed up with the National Hockey League’s Anaheim Ducks Organization.

The three-year partnership means the firm’s logo is displayed on players’ jerseys during home games, while the brand is promoted throughout the arena. Sales of sponsored merchandise and home wins also translate into donations made to local causes on the property manager’s behalf.

10. Renovations to appeal to renters

As developers focus on renovating properties to maximize their appeal, they are paying particular attention to how compatible their common areas are with working remotely. “By upgrading common areas like corridors, entry seating areas and club spaces, (owners) are creating fresher, more vibrant and flexible environments,” Eric Zuena, managing principal at ZDS Architecture & Interiors, told MHN. Properties are trending toward multifunctional common areas that often include pool tables, open kitchens, lounge seating and, of course, work-from-home accommodations. “Large conference rooms for booking are no longer necessary,” said Zuena. “These coworking spaces should have different seating types and pod rooms or phone booths providing privacy when needed.”

Source: Multihousing News