As 2022 winds to a close, I’m sure you’re getting inundated with predictions for 2023. While I certainly enjoy making predictions (like I did in 2019), I struggle with forecasting short-term trends. In 2019, for example, I was talking about renter flexibility and the disruption of the STR business. While the predictions were directionally correct, real estate is a slow-moving business with trends emerging over decades, not in a single year.
What’s more relevant and interesting to me are the longer-term trends impacting the multifamily industry. At Atlas, we buy/develop quality multifamily assets in good locations with the intent and flexibility to hold long-term.
As a long-term focused operator and developer, it’s my job to forecast and react to trends, so I think in periods of 5-10 years.
With that in mind, here are some of the trends I see impacting the multifamily industry over the next decade. Some of these may be big sea changes, while others are things I’ve observed around the edges.
Construction tech will (finally) disrupt the construction industry bringing down costs and compressing development timelines: I know I know, this is something that has been promised for the past decade with little to show for it. Generally, construction costs never come down, but the incentives and stakes are too high and the construction industry is too screwed up not be materially disrupted over the next 10 years.
Sean Sweeney captured it nicely with this tweet.
The failures of pre-fab and modular construction are well documented with issues across the board including the lack of skilled labor, financing issues, expectations of VC capital, and the real estate industry’s unwillingness to experiment with new and unproven technology.
However, that’s going to change (or so I hope). Robotically manufactured construction systems and new materials like light gauge steel combined with software will result in lower costs and faster timelines. Look for systems like BYLD to emerge.
The affordability crisis will materially impact space design with movable systems entering the mainstream: With rents outpacing wage growth and single-family homeownership out of reach for many, we’re going to see worsening affordability. Small studios (including micros), roommate focused 2BRs, and co-living units have emerged to address these challenges. As rents grow further and technology improves, systems like Bumblebee Spaces and Ori Living will be integrated directly into new development projects. These systems will get cheaper/simpler to ensure longevity and limit R&M risks.
Concierge level service expectations become the norm: Today’s renter, especially within class A communities, expects a high level of service driven by technology. It starts with searching for an apartment where 3D tours and virtual walkthroughs are expected and the application and leasing is done seamlessly online. Curated weekly events and happy hours are typical, work orders are submitted through an app and addressed quickly, and the leasing/operations team acts as a of concierge, focused on delighting residents.
For landlords, there are implications from a payroll perspective. Gone are the days of $1,500/unit payroll costs. On new deals today, I’m seeing payrolls in the $2,000+/unit to deliver the level of service that is expected.
Convenience will win and Airbnb will disrupt the rental market. Airbnb is one of my favorite companies. I’m both a guest and a host, and I’m continuously blown away by the simplicity and convenience of the platform. Dror Poleg has written extensively about Airbnb, noting how it initially targeted the low-end of the hospitality market, over time moving to the mainstream and high-end of the market. They’re doing the exact same thing in the housing market with its recent launch of a rental platform, a market it has already begun to disrupt.
In January 2022 Airbnb reported that 100,000 Airbnb guests stayed for 3 months of longer.
As Dror points out, “there’s no reason it should take 30 seconds to find, book, and pay for an apt on Airbnb and 30 days to find, pay, and move into the same apt through the traditional leasing process”.
I know this feels much more like a prediction, but the trend here is convenience winning and as a result, Airbnb will become a massive player in the multifamily industry.
Work flexibility and the array of what is considered a job will impact space design: The future of work and the role of the office is a hotly debated topic and not one that needs another opinion. We have shifted to a creative and networked economy. The middle class is going away, professionals are much more scalable with global reach, and the range of ways to make a living are endless.
What this means for multifamily owners/developers is that units and amenities should cater to this creative workforce including dens/office nooks in units, flexible co-working spaces, video production rooms, high-quality Wi-Fi, with great coffee and healthy snacks readily available.
Office to housing and build-to-rent strategies will boom, reducing the under-supply of housing. These are two separate strategies bulked into one trend of the new sources of multifamily supply.
First is the office to resi conversion space. With older well-located office buildings becoming obsolete and the under-supply of housing, there is a growing focus on converting offices to apartments. Silverstein Properties announced a dedicated $1.5B fund to target the opportunity. This is already happening as 28k resi units were created in 2021 and 50,000 more apts are underway. However, once office landlords face reality and leases signed in 2018/19 begin to roll, the floodgates will open.
With the unaffordability of single-family housing not getting better any time soon, young families will have to settle for the next best thing, purpose built single-family rentals. The pace of BTR starts is expected to increase to 180,000 units by 2025. Furthermore, the decrease in commute times resulting from remote and hybrid work will open up residential development opportunities further outside cities. Preferences haven’t changed and Millennials with kids want to own a home, but they’ll have to wait.
These two trends will help address the under-supply and affordability challenges.
Capital will continue to flow into multifamily, keeping a ceiling on cap rates: In 2022, multifamily transactions accounted for nearly 42% of all capital invested in commercial real estate. Multifamily will continue to attract additional capital, with institutional investors allocating a larger % of the portfolio to the asset class. Cap rates, which are determined by the flow of funds (debt and equity), will remain compressed and as a result there will be very little distressed pricing in multifamily.
I think I’ll stop there. Some of these are my own wishful thinking while others are obvious trends already in motion.
The beauty of making long-term bets is that you’ll most likely be right if you wait long enough.
Cheers to a great 2023.