Multifamily: Value-Add Strategies and Micro-Units Still Strong
It’s time for our monthly update on the state of multifamily. With the help of our friends at ABODO, let’s see is we can tackle covering what is effecting various markets around the country.
In the month of August, there were some pretty big winners in terms of rent growth. Emerging tech markets like Minneapolis ($1,197), Nashville ($993), and Portland ($1,222) saw rent increases of 14 percent, 13 percent, and 12 percent, respectively. What does ABODO attribute this to? Well, according to an August 5 report from the U.S. Department of Labor, the largest sector for job growth last month, with a whopping 70,000 jobs added, was in professional and business services. Of that number, 37,000 jobs fell under professional and technical services and 8,000 jobs were added to computer systems design and other related services.
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But what about Houston’s 14 percent decrease from last month to an avg. rent of $1,350? It’s no surprise that the energy hub is still suffering from low oil prices. Another factor contributing to the drop in rental rates is the fact that new additions are outpacing demand. CBRE research also points out that as supply increases, the saturation of apartments in lease-up continues to drag down occupancy rates.
Value-Add & Micro-Units
Moving more towards the investment and development side of things, it seems that a value-add strategy is still very popular among developers. A few months ago we published an article on why Class-A is our and Class-B is in. We stated that, in attempts to remedy the market gap, developers were turning to renovating older apartment buildings in response to a huge demographic shift: renters expect more but can’t afford to give up a huge chunk of their paycheck for those desirable Class-A units. As we mentioned in March:
“The most promising value-add prospects can be found in 1980s assets which are in need of reinvestment in order to replace, and ultimately upgrade, the interiors, amenities, appliances etc. of the units.”
The trend is still going strong today. According to Marcus and Millichap, the percentage of vacant class-B and class-C properties averaged out at 2.7 percent in Q2 of this year, down from 5.2 percent in 2012 while the percentage of vacant apartments in class-A communities rose from 5.2 percent to 6.1 percent over the same period of time.
Let’s face it, the new generation of renters value simplicity, minimalism, and affordability. Maybe this is why we’ve seen such a rise in micro-unit developments. Micro-units are both trendy and financially efficient for Millennial renters, which may be a signal of where the market is headed.
While multifamily rental rates are anything but stable, developers and investors are banking on value-add projects and tech-ready micro-units to carry them through the year.
