The Rise of Luxury Apartments: A Flight-to-Quality Trend

by: Will Lin

The COVID-19 pandemic has had a profound impact on the real estate market, with demand decreasing in the hospitality industry and among many others. However, in the luxury apartments sector, many tenants elected to hop on the trend of paying more for less and valuing quality over quantity; as a result, the demand for luxury apartments has increased significantly. According to JLL, overall leasing volume in luxury property types has increased 24% over 2021 activity and a record number of leases have been signed ⁽¹⁾. This activity illustrates the resiliency and relevancy of luxury properties within the real estate market which proves to be valuable information for investors and developers who would like to capitalize on this market.

One of the major driving factors for the increase in demand for the luxury apartment sector is the increased growth of the U.S. population. In 2022, the U.S. Census data revealed that there was a 0.4% increase, or 1,256,003, to 333,287,557 in the U.S. resident population as well as an influx of 1,010,923 immigrating to the U.S. ⁽²⁾. With the continued population growth, the demand for housing will continue to increase and that proves to be true, especially in the luxury apartments sector. Furthermore, Mike Cobb Jr, director of analytics at the CoStar Group states that the increasing costs of construction and materials make it challenging to construct profitable multifamily properties of lower quality rather than higher quality ⁽³⁾. Not only are developers and investors flocking towards the high-end and profitable luxury apartment market, but consumers are also gravitating towards these properties that boast premium features and access to luxury amenities. This flight-to-quality trend is especially prevalent among young affluent professionals who are looking for places to live that provide access to a variety of high-end amenities within a short walking distance.

With the current economic conditions it is essential to take into account the impact of the Federal Reserve’s interest rate increases and how this can influence the luxury apartments market. At first glance, rising interest rates can pose a potential threat to investors of luxury apartments as they need to pull out money from their portfolios to purchase these types of real estate ⁽⁴⁾; however, higher interest rates can deter buyers from taking out mortgages to purchase homes which can drive up rental prices and potentially lead to higher profits for luxury apartment owners and investors. For example, JLL reveals in their 2022 end-of-year recap that tenants have signed a historic number of leases for premium rental spaces in Manhattan, with 190 leases starting at $100 or more per square foot and covering a total of 6.1 million square feet. This leasing volume is twice as much as the previous record set in 2021, which was three million square feet for premium rentals.

The flight-to-quality in the multifamily apartment sector is a trend that is continuing to grow in the post-COVID world. Here at Lever Capital Partners, we pride ourselves on our ability to finance all types of multifamily deals including your next luxury apartment project. Our expertise in financing luxury apartment projects in various stages is diverse and extensive and we are able to get you the most accretive financing options catered specifically to your strategy and business plan. We believe that understanding the availability of different capital structures is the foundation for curating the most efficient capital stack for our client’s projects. Our ability to promptly evaluate creative alternatives allows us to direct any project towards the most optimal capitalization structure given the current market conditions and our client’s strategy and goals.

References:

https://rew-online.com/record-number-of-100-plus-leases-signed-in-2022-as-tenants-seek-premium-space/ https://www.census.gov/newsroom/press-releases/2022/2022-population-estimates.html https://www.virginiabusiness.com/article/flight-to-quality/ https://www.wsj.com/articles/new-york-citys-luxury-apartment-market-under-pressure-in-2023-11673742970

A Hot Market For Medical Office Buildings

by: Ethan Newman

Are you aware medical office buildings (MOBs) are arguably the safest asset to invest in? Since the pandemic, vacancy rates skyrocketed for traditional offices. The Sage Group reported office space vacancy rates in 2022 in downtown Los Angeles and Long Beach, California were 18% and 26% respectively ⁽¹⁾. Despite MOBs being a subset of traditional offices, the demand for medical office space stayed resilient throughout the pandemic even with the rise of telemedicine ⁽²⁾. The Connected Real Estate Magazine shared how 2022 vacancy rates for MOBs nationally were only 8% ⁽³⁾. With MOBs outperforming traditional offices, what has contributed to MOBs becoming a reliable investment?

Because of the rise of the aging United States population, the demand for medical office space is increasing. Although there is strong demand, supply is relatively low for MOBs mainly due to construction obstacles that have in turn made existing healthcare properties more valuable.

One of the reasons for this noticeable demand for medical office space has to do with the aging population in the United States. U.S. data census estimates one in five Americans will be 65 and older by 2030 and one in four Americans will be 65 and up by 2060. Because of the aging population, medical-related office visits are becoming more frequent which leads to practices demanding more space. For example, RPC reported that the average amount of current office space per person is around 5.3 square feet, but this number is estimated to increase to 11.2 square feet per person in order to accommodate the higher aging population ⁽⁴⁾.

Although there is an increased demand for MOBs, new supply is lagging. The San Diego Business Journal claimed supply of MOBs in 2022 does not meet demand ⁽⁵⁾. Alliance reported that the average price per square foot for MOBs is $498 where retail is $245/per square foot and normal offices are $315/per square foot. Because MOBs are costly and require complex construction standards compared to other assets, there is less activity in the construction pipeline which results in a lower supply. To put this in perspective, there is only 1% of the amount of space under construction for MOBs compared to the existing stock available ⁽⁶⁾.

Due to the recent pandemic and the realization that there is a significant shortage, MOBs have become a very desirable investment. From the second quarter of 2021 to the second quarter of 2022, the average price per square foot of MOBs increased by 20%. As a result, the limited supply makes existing properties more and more valuable ⁽⁷⁾. With property values increasing, the average cap rate for MOBs dropped to an all-time low of 5.5% in 2022. Aside from rapidly increasing values, investing in MOBs allows capital providers to diversify their overall portfolios by tailoring their tenant mix in each MOB that they own. This can be done because of the variety of medical tenants in need of the same type of space.

The escalating demand for MOBs presents a momentous prospect for investors seeking steady cash flow and low-risk investment opportunities. As medical practices continue to expand and require more space, the construction of new buildings is anticipated to persist. Capital providers nationwide have expressed keen interest in financing the development and acquisition of such assets, and Lever Capital Partners collaborates closely with these entities, which actively disburse senior and mezzanine debt, preferred equity, and joint venture equity for the acquisition, development, and recapitalization of medical office assets across the country. By optimizing our clients’ capital structures, we enable them to concentrate on operations, construction, and asset management, while ensuring that the capital we procure establishes each project for success, regardless of the prevailing market conditions.

https://www.sageregroup.com/did-remote-work-collapse-the-southern-california-commercial-office-space-market/embed/#?secret=CXTEGUhD3k

https://risingrp.com/insights/medical-office-building-investment/embed/#?secret=sUOUafpZDH

https://connectedremag.com/uncategorized/medical-office-cre-shows-strong-signs-of-improvement/embed/

https://www.rpcpropertytax.com/archives/aging-u-s-population-expected-to-drive-demand-for-medical-office-space/embed/

https://www.sdbj.com/news/enews/medical-office-space-high-demand-low-supply/embed/#?secret=m6Qb5MBUoN

https://alliancecgc.com/education/medical-office-building-market-trends-past-and-present/embed/#?secret=6iXjSMUCeY

https://www.commercialsearch.com/news/medical-office-sector-resists-adversity/