Ben Kasdan – Midwest real estate experts preview 2020 multifamily trends
December 11, 2019
As the industry enters a new decade, concerns about a recession and oversupply in the U.S. multifamily market seem to be in most investors’ rearview mirrors. Instead, as noted in the recent U.S. Multifamily Outlook report by Yardi Matrix, investors remain bullish on the sector as favorable demographics and the continued growth of lifestyle renters—both old and young—is motivating developers to keep pace with demand. This is certainly the case in Chicago, where healthy absorption and solid rent growth are predicted through 2020, according to Yardi.
“Chicago continues to enjoy robust job growth, especially in the tech sector where jobs are concentrated in the city’s urban core,” said Ben Creamer, principal and managing broker of Downtown Apartment Company, a full-service real estate brokerage specializing in luxury rentals in Chicago. “This perpetuates the increased demand for Class A rentals in the city, as does the large percentage of millennials and empty nesters who prefer renting to owning. With demand at an all-time high, expect to see rents continue to rise in tandem.”
Susan Tjarksen, managing director of Cushman & Wakefield’s Multifamily Capital Markets Group, says multifamily will continue to be a strong segment for investors in 2020, but that niche plays like co-living, short-term rentals and affordable housing will be the hottest deals.
“Co-living is increasingly popular, especially among young people who want to live in the best neighborhoods with the best amenities, but at a price much lower than a traditional apartment,” Tjarksen said. “As such, this niche sector has garnered tremendous interest from major national and international capital sources.
“In addition, short-term rentals will soon emerge as institutional investment-grade assets, and the data shows they are poised for continued growth,” Tjarksen continued. “We’re also going to see the continued evolution of affordable housing in Chicago as demand leads a variety of private and public partners to join forces to solve the workforce housing crisis.”
Going into 2020, experts say the following trends will drive multifamily development, leasing and property management in the year ahead.
Privately funded public amenities
In an effort to attract and retain residents, most apartment developers include a full slate of amenities in their projects—from state-of-the-art fitness centers and music rooms to demonstration kitchens and art studios. But in the upcoming decade, look for developers to incorporate—and pay for—civic amenities, too, such as community parks and plazas. Not only do these spaces serve as a backyard for multifamily residents, but also as an amenity for the public to enjoy.
For example, Related Midwest and its development partners recently enlisted noted landscape architecture firm Michael Van Valkenburgh Associates to reimagine the 5 acres of green space at Chicago’s revitalized Lathrop mixed-income development. The new park serves as an amenity for its residents and the neighborhood, embracing the Chicago River with a quarter-mile riverwalk that includes bench seating, a causeway bridge, kayak launch and native landscaping. Additional improvements included the rehabilitation of Lathrop’s iconic Great Lawn, a 2-acre green space at the heart of the community that provides a new playlot, riverfront dog park and pedestrian connection between Clybourn Avenue and the riverfront.
“We develop green space because we believe it to be a vital extension of our wellness offerings for residents and a way to benefit the communities in which we work,” said Curt Bailey, president of Related Midwest. “When we join a neighborhood, we see its residents, leaders and the city as partners, helping us better understand what the community needs. Increasingly, this means developing publicly accessible parks that strengthen the neighborhood and establish projects like Lathrop as central to the urban fabric.”
Along the South Branch of the Chicago River, Lendlease recently completed the public 2-acre Southbank Park as the centerpiece for its new mixed-use Southbank development. And across town in the Lakeshore East community, Cascade Park—a new public green space on the lakefront created by Lendlease and its partner Magellan Development Group—will anchor the firm’s two-tower development that includes Cirrus, a luxury condominium tower, and Cascade, an adjacent rental tower.
“It’s a crucial time for our global environment, so as developers, we must look to the future and how the addition of green space, along with sustainability features like native plantings, birdhouses and stormwater management, positively contribute to the overall wellness of not just our residents, but all citizens,” said Ted Weldon, executive general manager of development for Lendlease’s Chicago office. “Urban regeneration is at the heart of what we do at Lendlease and parks play a major role in creating the innovative and vibrant city spaces we are known for developing.”
But it’s not just green spaces developers are focusing on for public engagement. Design-driven real estate development firm Optima, Inc. has its eye on the public arts, too. At Optima Signature, a luxury rental tower steps from Michigan Avenue in Chicago, passersby can enjoy the bright yellow 15-foot Kiwi sculpture in the community plaza designed by architect and Optima CEO David Hovey, FAIA. And at Optima Sonoran Village, a five-building rental community in the heart of downtown Scottsdale, Ariz., residents and neighbors-alike can take in a water feature and five original sculptures by Hovey throughout the community’s landscaped courtyards.
Although the Chicago City Council recently adopted tougher legislation regarding the bulk sale of condominium buildings—potential buyers must now secure the approval of 85% of condo owners—some experts, like Interra Realty, which has brokered 15 deconversions in the Chicago area since 2017 and currently has two approved sales in due diligence, predict Chicago is entering “Deconversion 2.0,” despite the higher threshold for owner approval.
“As long as the deal pencils out for both the buyers and owners, deconversions will continue,” said David Goss, Interra’s co-founder and managing principal. “With the controversy swirling around deconversions, it’s easy to forget they can actually be excellent deals for unit owners, offering a premium over what they could get on the open market.”
Kyle Stengle, senior vice president of investments for the Chicago Downtown office of Marcus & Millichap and a deconversion veteran, agrees. “I anticipate deconversions will continue in 2020, even if there is a decrease in velocity,” Stengle said. “If a city building passes with the increased (85 percent) threshold, that will only reconfirm the condo building is well-suited for a deconversion and that there’s strong interest for these deals. That said, a future slowdown in deconversion transactions would be more substantial if there were other factors, such as negative shifts in the commercial real estate investment market or a decreasing supply of condo buildings that are candidates for a deconversion.”
Meanwhile, some experts are predicting 2020 will see the first wave of successfully deconverted properties change ownership once again as part of an exit strategy.
“Many of these buildings were bought with short-term intentions and were not expected to be held for the long term,” said Todd Stofflet, managing director of Cushman & Wakefield’s Midwest Multifamily Advisory Group. “The conversations we’re having now with owners are about whether and how much they should renovate. Some recent buyers are thinking, ‘If I can get through the acquisition of all the units, will there be enough value created to sell the building as is, without making any additional capital expenditures?’ They are creating a lot of value just by bringing the building back to 100 percent rental, and the appetite for value-add multifamily in premium locations is very strong.”
Gearing up for the Gen Z rush
Move over millennials. When talk turns to what’s next in rental communities, savvy apartment developers are now looking ahead to the desires of Generation Z. Having grown up with the internet, smartphones and social networks, Gen Z seeks on-demand experiences that marry technology and mobility with real-world human interactions. For developers, this means creating communities that focus on shared spaces, accessible programming and design that embodies the spirit of the neighborhoods in which they’re located.
“Gen Z relates in a digital world and they rapidly absorb and seek knowledge, leading them to crave authentic experiences and dialogue in their daily lives,” said Mary Cook, founder and president of national award-winning commercial interior design firm Mary Cook Associates (MCA). “Born between 1995 and 2015, Gen Z is currently 74 million strong and influencing our interior design work for both market-rate multifamily communities and student housing developments. As a result, we incorporate designs and spaces that are rooted in styles Gen Z can tangibly identify with and that are tailored to their locale.”
Lapis, an 1,100-bed, three-tower student housing development under construction at Florida International University, features common areas designed by MCA with Gen Z in mind. Because the university attracts a large number of students from the surrounding neighborhood, there is a strong Latin-centric culture within the student body. MCA used strategic programming, psychographics and carefully curated furnishings to create a variety of lifestyle areas that would be familiar to students. MCA even designed a Cuban coffee bar as the centerpiece for Lapis—a thoughtful addition that plays to Gen Z’s need for genuine experiences.
At Plaza Verde, a live/learn student housing community at University of California, Irvine, designed by KTGY Architecture + Planning, the building is organized around several public courtyards that are programmable for events and gatherings—ideal spaces to enjoy SoCal weather with friends and neighbors. A public plaza, multi-purpose academic space, 18 study rooms of varying configurations, coffee shop and gathering spaces create a vast social hub.
“As architects, we are challenged to design spaces that will enhance the living experience—whether it’s a spot for a local art exhibit, coworking or get-togethers, all will contribute to the success of the building with Gen Z residents who crave a strong sense of community,” said Benjamin Kasdan, AIA, associate principal in the Tyson, Va., office of KTGY.
“In a word, Gen Z is connected,” said Ben Creamer, principal and managing broker of Downtown Apartment Company. “They want to connect to their homes via an app that can control everything from their door locks to maintenance requests. They want to connect with their neighbors through organized social activities and shared spaces. And they want to connect to their work from tech-savvy coworking spaces in their apartment buildings.”
According to Bentley Phillips, founder of Spaces Real Estate, a full-service real estate brokerage specializing in residential leasing, two of the most important components for prospective Gen Z residents are proximity to work or conventional transit, and a fulfilling social life both outside their building and within.
“Typically, this cohort is willing to take less space for a prime location and to avoid a long commute,” said Phillips. “For example, 1553 N. Wells, in the heart of Chicago’s Old Town neighborhood, has been very popular among Gen Z. Why? Because it has a Walk Score of 98. Residents have quick access to transit with bustling nightlife, trendy restaurants and shopping right outside their doorstep. And the building will activate its amenity spaces throughout the week with events like cooking classes or social events.”
Gen Z’s digital prowess also requires a smart approach to marketing. “We’re seeing renters across all age groups making leasing decisions earlier in our marketing funnel, using digitally available property information, but that trend is strongest among Gen Z,” said James Love, vice president of marketing and brand with Draper and Kramer, Incorporated. “Younger renters often come into our leasing centers ready to sign, almost sight-unseen. Because of that preference for a less hands-on experience with our leasing center, we are fully rounding out mobile leasing collateral for all properties.”
From must-have technology to popular pet perks, the 2020 Apartment Resident Preferences Report released by the National Multifamily Housing Council and Kingsley Associates provides an extensive look at what apartment residents want and need in their home today. But what about tomorrow? What amenities will renters be looking for in the future?
With two very different generations—millennials and baby boomers—dominating the rental market and Gen Z emerging, future-proofing assets with flexible amenities is a smart play in 2020, according to Steve Fifield, CEO at Fifield Cos. For example, at Logan Apartments, a 220-unit apartment building in Chicago’s Logan Square neighborhood, Fifield Cos. and Terraco Real Estate designed the community’s amenity spaces to be flexible enough so they could meet the needs of today’s millennials, but also the different demands of tomorrow’s Gen Z renters, whether that means increasing coworking space or modifying fitness areas.
Flexible space is also evident at 727 West Madison, a 45-story luxury apartment tower in Chicago co-developed by Fifield Cos. and F&F Realty Ltd.
“A developer can guess how amenity space will be used, but sometimes residents surprise you,” said Fifield. “727 West Madison is the tallest building west of the Loop, so we dedicated part of the penthouse level to the Sky Lounge, a sophisticated entertaining showpiece and private bar that gives residents unprecedented views. While residents use the space as we expected, on an almost daily basis residents also use it as a coworking space, even though we have dedicated coworking spaces elsewhere in the building.”
In agreement that the ever-blurring line between work and home will continue to influence multifamily amenities in 2020 is the interiors group at Morgante Wilson Architects, which has designed and programmed amenity spaces at various Chicago high-end suburban and downtown rental properties, including 727 West Madison.
“Public spaces in new buildings will serve two purposes: a social hub for relaxing, as well as a place that can accommodate someone who wants to get a little work done,” said Elissa Morgante, co-founder of Morgante Wilson Architects. “We’re creating comfortable and cozy, semi-private spaces that offer mini-destinations within the amenity floor, like a big comfortable banquette seating area that’s as well-suited for reading or having an intimate conversation as it is for checking in with the office on email or taking a conference call.”
Offering services and amenities that make the lives of busy residents easier and less stressful is a big focus for Optima, Inc. in 2020. Residents at Optima’s Arizona rental communities can now access “Optimized Service,” an innovative in-home concierge program that is a game changer in the Scottsdale, Ariz., market. Through the new program, Optima’s on-site teams provide many complimentary in-home services, including dry-cleaning pickup and closet delivery, plant watering, thermostat adjustments and in-unit package delivery.
“Our property management team is focused on providing exceptional service that exceeds our residents’ needs,” said David Hovey Jr., AIA, president of Optima, Inc. “Residents at our communities are provided with more than the tangible amenities we design for our developments; they’re also given access to the highest level of service available in the market.”
What’s old is new again: Market-rate acquisitions
With the cost of construction materials and labor still rising, multifamily acquisitions are looking more attractive than ever in 2020 compared to new builds in many markets around the country.
One national firm prioritizing market-rate acquisitions as part of its strategic direction heading into the new decade is Draper and Kramer, Incorporated. The company’s most recent transactions involve recently constructed Class A apartment communities situated in the urban core and growth-oriented suburbs of Chicago and Dallas.
“In each case, the property was new enough to have many of the luxury features and finishes renters are looking for, but also offered the ability to update amenities, as needed, in order to maintain the property’s competitiveness over the long run,” said Blas Puzon, chief investment officer of Draper and Kramer. “Acquisitions like these are an important complement to our development activity in 2020, particularly as we look to bolster our footprint in markets where we see potential for long-term growth.”
Also having an eye on market-rate acquisitions for the upcoming year is The Habitat Company, a leading U.S. multifamily developer and property manager. “After several years of construction cost increases outstripping rent growth, the returns available on acquisitions have narrowed the gap with new development,” said Matt Fiascone, president of The Habitat Company. “Factor in the added ‘hidden costs’ of entitlement, such as taxes, inclusionary zoning requirements and other fees and risks associated with new development, and the result is positive for a strategy that favors acquisitions.”
Golden years and greener pastures
They may be approaching their golden years, but there’s no slowdown in sight for today’s busy and wellness-focused baby boomers. As such, developers are becoming more mindful of designing communities that respond to the demands of more youthful, health-conscious seniors.
Active, independent adults were certainly in mind when developer F&F Realty, Ltd. recently converted a vacant hotel in Chicago’s northwest suburbs into The Grand at Twin Lakes, a 118-unit independent living community. Resort-style senior living is the community’s driving philosophy, which is supported by upscale design, best-in-class wellness amenities and a diverse range of on-site activities and programming.
“With 39 percent of the building dedicated to amenity spaces that cater to interests, hobbies and entertainment, The Grand is not the type of senior community where residents have to sit around,” said Dave Pokorny, director of operations for F&F Realty’s Grand Lifestyles portfolio, which owns and operates The Grand. “Residents have access to a movie theater, two libraries, game rooms, a salon, lobby bar, courtyard and garden. The building is also adjacent to the Twin Lakes Golf Course & Recreation Area, offering seniors opportunities to fish, golf, explore the outdoors and be part of the larger neighborhood through park events and programming.”
Developer CA Senior Living, a division of CA Ventures, is also predicting that active seniors will prefer to live in highly amenitized luxury buildings going forward. The firm is developing Anthology of King of Prussia, an 11-story, 192-unit senior living community in King of Prussia, Pa., approximately 17 miles northwest of Philadelphia. The community, featuring two sky decks among its 20,000 square feet of amenities, is the first senior living option with independent living, assisted living and memory care in The Village at Valley Forge, a 122-acre mixed-use lifestyle village.
“This project offers residents all the amenities of a high-rise luxury condominium with hospitality-level service, plus on-site care if and when they need it,” said Ben Burke, president of CA Senior Living. “In addition, the location provides walkability to retail, specialty dining, entertainment and medical offices, immersing residents in a neighborhood where everything they want and need is just around the corner.”
Similarly, HSA Commercial Real Estate has proposed a senior apartment mid-rise for The Mayfair Collection, its walkable, mixed-use development located in the Milwaukee suburb of Wauwatosa. The 69-acre Mayfair Collection is anchored by Whole Foods and Nordstrom Rack, offers 400,000 square feet of shopping, an eclectic mix of local restaurants, a Hilton Homewood Suites and almost 300 luxury apartments.
“With proximity to upscale retail offerings and a hotel for visiting families, The Mayfair Collection is an ideal location for seniors who want to stay connected and maintain active lifestyles,” said Tim Blum, executive vice president and managing director of retail for HSA Commercial. “We are proposing a full continuum of care for this senior community, making it possible for seniors to age in place in a vibrant neighborhood.”