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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   November 2018

Renters Are the New Gold Standard

Demographic shifts and housing-market realities favor a thriving multifamily sector

During the second half of 2018, the commercial real estate market has adapted to major shifts occurring within the multifamily sector since 2017. Last year saw a significant increase in renters over homeowners, and investors have adjusted accordingly to take advantage of the trend.

Moving their focus to renters could easily be the wisest strategy for investors in the coming year. Mortgage brokers should be equally proactive.

To benefit from the current profitability of renters, commercial mortgage brokers must understand the reasons behind their rise in value. They also should take steps to capitalize on this market in the coming months.

Honing in on renters

As the multifamily sector continues to gain traction in the context of rising home prices and tight inventory, investors will look for opportunities and bigger returns in value-add opportunities. Consequently, it’s important for commercial mortgage brokers to align their goals as well. In the Class B and C multifamily asset classes especially, value-add business plans offer good upsides.

Tenants are willing to pay higher rents for higher-quality housing. It’s also important to keep in mind that the multifamily sector will always be advantageous for investors, simply because everyone needs a place to live. This will never change.

Multifamily, unlike other commercial asset classes, is insulated from a lot of downside risk. It will remain attractive to investors even as the market ebbs and flows because, with minimal risk involved, they can’t go wrong. Brokers can adopt a similar mindset. When it’s not a homebuyer’s market, multifamily rentals become more attractive. There is profitability within this asset class.

Demand drivers

Projections by market experts have correctly indicated increased interest in renting in the current real estate climate. Homeowners are facing a significant increase in interest rates and a reduction in tax benefits, so potential buyers don’t have a strong economic incentive to purchase a home.

Renting is now a more appealing and sometimes necessary option, given the current cost of living has become too high for many people to venture into homeownership. Cost of living aside, many high-earning millennials also are more inclined to rent to accommodate their lifestyles. Rentals offer less perceived risk and more flexibility for young people not ready for a long-term commitment. Student debt is another factor, as many millennials may prioritize paying off loans over saving for a downpayment.

Americans over age 55 have grown more interested in renting as well. Many baby boomers and empty nesters are more inclined to downsize from single-family homes into apartments. Many are looking to relocate from the suburbs to urban environments, where they often choose renting over buying.

Millennials and baby boomers who rent tend to focus first on location. They view housing as an integral part of their lifestyle, but tend to prefer spendy downtown areas that offer easy access to transportation, work and recreation. They also seek Class A amenities like lounges, gyms and a built-in social atmosphere. Right now, to achieve this combination, renting is the more sensible option.

Commercial mortgage brokers should take note and begin assessing the needs of renters in key secondary cities.

Leveraging the trend

Years of short supply have resulted in pent-up demand in the multifamily market, with an upsurge in Class A assets across the country. Today, wealthier renters have plenty of options to choose from.

Developers are continuing to build luxury units attractive to those looking for high-end accommodations in central locations. Brokers working in this market must take the opportunity to expand their client base, as the demand for luxury rentals continues to increase.

Brokers in major cities also would be wise to monitor the growth in popularity of micro units, a rising area of interest among investors and more cost-conscious renters. Micro units are smaller multifamily units (often between 150 and 500 square feet) in major cities such as Los Angeles and San Francisco. Entry-level executives and white-collar workers, many of whom are millennials, are willing to rent a small space for the chance to live in a big city.

Of equal importance, investors also have started diversifying into secondary markets like Houston; Pittsburgh; Brooklyn, New York; Oakland, California; and Kansas City, Missouri, where the institutional capital is less expensive than in gateway cities like New York or Washington, D.C. Assets within these secondary-market areas offer solid loan-to-value ratios for investments and better overall yields, with less demand chasing commercial assets.

Meanwhile, gateway cities are increasingly oversaturated with capital investment and development. Investors have become cautious with respect to these heavily populated markets. Commercial mortgage brokers should take note and begin assessing the needs of renters in key secondary cities. Renters in these areas typically have needs similar to those of individuals in gateway cities. They want downtown accommodations offering luxury amenities while staying within a certain budget.

As a result, secondary cities are steadily attracting developers looking to make a mark by offering renters Class A accommodations at affordable prices. Brokers in secondary cities are likely to see more rental-property closings and a surge of interest from potential clients, especially millennials, looking to live in growing downtown regions. Today’s consumers also are attracted to cities like Oakland that provide easy access to the offerings of larger neighboring cities, with reasonably priced housing options.

• • •

Changes in population and housing affordability are leading more people toward renting, which means investors are carefully eyeing opportunities designed to meet this demand. Commercial mortgage brokers can easily take advantage of the chain effect by adapting their sales strategy to prioritize deal opportunities that serve renters in both gateway and secondary cities, and by closely monitoring the needs of millennial and 55-plus consumers. Both groups will continue playing critical roles in the upswing of the multifamily sector.

Although the multifamily sector walks a fine line between promoting affordability and avoiding a surplus of supply in some markets, it is still considered an extremely valuable sector for investors. Commercial mortgage brokers can use this information to pursue lucrative business opportunities that address the needs of today’s renters. Targeting renters now will provide a significant competitive edge in the year ahead.  


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