Tag Archives: multifamily

The Millennial Influence: What the Rise of Short-Term Rentals means for the Housing Landscape

by: Ao Ma

The rise of the Millennial generation has had a significant impact on the real estate market, particularly in the area of short-term rentals. Reaching “peak Millennial” in 2015, USC Professor Dowell Myers states that the majority of this cohort has surpassed the age of 25, which has historically been the threshold for generations entering the first stage of the housing life cycle – homeownership.(1) For millennials, however, they arrived at an inopportune time. From 2014 to 2022, US multifamily rents have increased by a staggering 49%, while wages and salaries at private companies rose only 29.1%. High living costs, coupled with elevated student debt balances, have made it difficult for many Millennials to afford to buy a home. On top of this, Millennial values also gravitate toward short-term living solutions since they offer a more flexible lifestyle than traditional year-long lease terms, granting them very sought-after lifestyles to travel and “live in the moment.” As a result, the vast Millennial cohort has turned to short-term rentals.(2)

Accompanied by the rise in demand, data from AirDNA, a vacation rental analysis company, illustrates that the supply for US short-term rentals has increased by nearly 20% since 2019. Companies like Sonder, a boutique apartment-hotel hospitality company, have expanded their short-term rental offerings by operating traditional condo units like hotel rooms. Marriott has also capitalized on this opportunity by introducing its sub-brand Homes & Villas, a vacation rental platform. For many investors, this short-term rental model can typically yield higher income due to higher daily rates and the ability to adjust prices in high versus low seasons. The distinctive implication for the housing market here is that this approach significantly impacts housing affordability and the availability of long-term rentals.

As investors realize they can generate higher incomes via a short-term rental model through platforms like Airbnb, they are more willing to pay a premium for properties that otherwise wouldn’t be profitable if leased out traditionally. In other words, if a homebuyer can rent out their unit on occasion at the additional monthly mortgage amount from the premium, the decision to pay more can be justified. For example, a homebuyer may consider paying $100,000 over the listing price if they can rent out their unit for a weekend per month at a rate of $600-$665 since this would be the monthly mortgage payments assuming 6-7% interest rates. While this method can make homeownership “more affordable,” the increased willingness to pay at a premium further drives up prices. 

On the other hand, long-term rents will rise due to limited supply and increased competition when more traditional units get converted to short-term units. The implication of this offers an opportunity for investors looking to acquire or develop multifamily properties. From core to opportunistic multifamily investors, there is an opportunity to capitalize on the tight rental markets by attracting tenants who were forced out of long-term lease apartments that have since been converted to a short-term model.

In the current economic environment, it’s critical to consider how the Fed’s interest rate hikes control rent price inflation and how that affects the housing landscape. Though the belief is that lowered consumer and business spending leads to lower home and rent prices, that might not be the case. Instead, rising rates can force frustrated buyers into the rental market, increasing competition. Also, rate hikes can limit new construction lending, reducing future housing supply. Either way, there is no clear correlation between rates and rents, but what’s clear is that such raises can create market instability and potentially force the economy into a recession. For short-term rental giant Airbnb, CFO Dave Stephenson says the possible economic downturn hasn’t been enough to cause concern as he believes the increasing number of tourists eager to get back to traveling can preserve demand even in tough economic times.(3)

The decline in homeownership among Millennials and their changing lifestyle preferences, combined with favorable industry trends and financial data, suggests that this short-term operating model is here to stay. Here at Lever Capital Partners, we pride ourselves on our ability to finance your next short-term rental project. Through our significant experience in the space, we are able to get you the most attractive financing the market has to offer. We look forward to discussing your next project and putting together a capital structure that best suits your needs.

References:

https://www.nytimes.com/2017/01/23/upshot/peak-millennial-cities-cant-assume-a-continued-boost-from-the-young.html

https://educationdata.org/student-loan-debt-by-generation

https://www.costar.com/article/1874040746/us-short-term-rental-market-poised-for-further-growth

Should You Convert Your Distressed Office Building to Multifamily?

by: Aidan Schenck

There’s a newfound need for office buildings, just not for office space. Work From Home has reduced the need for office space thereby creating large vacancies and in some cases, completely empty buildings. So what does the future hold for such assets?

As you might have heard, the United States faces a serious housing shortage. This has resulted in increased rental rates as demand far outpaces supply. Repurposing vacant office buildings that once were extremely sought-after into apartment buildings has become a highly desired adaptive reuse project for many owners. Due to the dire need for housing, local, state, and federal subsidies for repurposing such buildings have been made available and many jurisdictions have lifted zoning restraints on such projects.

The future suggests that this adaptive reuse will likely be here for many years to come. However, despite the promising profitability of such projects, obtaining affordable financing for it in the current economic and global state is a challenge.

In 2021, the country as a whole had its lowest vacancy rates in office buildings since the 1990s. In California there’s been a four basis point increase in vacancy rates in office buildings from the end of 2021 to the end of Q1 in 2022. As of late April, New York City, which is one of the largest in-person working epicenters in the world, only saw a 37.1% office building occupancy rate. Data from Commercial Edge, a real estate data firm, reveals that Office Buildings’ price per sq. foot has dropped in Central Business Districts to $284 when it was once at $400 in 2019 and $370 in 2020.

While office assets continue to struggle, multifamily apartment buildings are holding their value, as many markets continue to see significant rent growth. Due to the housing shortage, there is strong demand, alongside limited supply, significantly increasing rent. Additionally, consumers are willing to pay months of rent in advance and are paying well beyond the original asking price to ensure they have a place to live. On top of all of that, as interest rates rise the cost of living follows. As a result of this shortage combined with rising interest rates, 1-bedroom (1). 

These two trends working together have made repurposing office buildings into residential apartments a highly attractive project. Also, this type of project is even more attractive and profitable, as certain parts of the United States have subsidized portions of such repurposing and have lifted many zoning restraints on such projects. This is seen and proven by the increasing popularity of repurposing office assets into apartment buildings. In the past two years, around 41% of buildings that were repurposed into apartment buildings, were formerly failing office buildings. On top of that, between 2020 and 2021, there were nearly 32,000 conversions, compared to a mere 5,300 conversions in 2010 (2).

Given the soaring values of existing multifamily apartment buildings and the decreasing value of office assets, repurposing existing office buildings offers substantial opportunity for experienced sponsors. However, to achieve profitability with this strategy, creative yet efficient financing is direly needed, given the current economic state. Lever Capital Partners can help! Through our expert knowledge of current real estate trends, economic states, and the capital market space, alongside our significant real estate financing experience, we can help you optimize your capital stack by bringing the most efficient capital to the table that’s tailored to your adaptive reuse business plan and strategy.

References: 

https://www.noradarealestate.com/blog/rental-prices/

https://www.rentcafe.com/blog/rental-market/market-snapshots/adaptive-reuse-apartments-2021/

Multifamily, The Post-Pandemic Investment Poster Child: An Inside Look at Post-Pandemic Multifamily Investment Trends

By Will Crystal

The effects of COVID-19 have been felt throughout the entire commercial real estate sphere and continue to impact investment decisions across all property types. The pandemic has revealed a plethora of new opportunities in the marketplace, creating trends that are expected to continue into the foreseeable future. One of the most notable trends we are seeing is an uptick in multifamily investment and financing. The combination of record-high rental rates, surging demand, and skyrocketing market values is creating financing and capital event opportunities for property owners while forcing developers and investors to get creative.

Demand for multifamily housing has spiked dramatically in the first three quarters of the year and according to data from property management and analytics platform RealPage, “absorption of multifamily units jumped by more than 255,000 in the third quarter.” This extreme increase in demand can partially be attributed to the post-pandemic job market recovery we’ve been seeing, specifically regarding middle and higher-income jobs. Peter Linneman, of Linneman Associates, “believes that 3.5 million people will return to the workforce in the next six to nine months, and there will be an additional 2 million or more jobs added as the economy continues to grow” (Linneman, BisNow). Subsequently, more people than ever before can afford apartments due to stabilizing incomes related to job market recovery. This can be attributed to “the most recent ADP data from September [2021], indicating a [growth in] jobs [from] the previous two months”, due to the “elimination of the additional unemployment benefits issued in response to the pandemic” (Linneman, BisNow). Significantly more people are seeking employment as covid subsides and there is no shortage of available jobs, from the restaurant business to middle-income level jobs.

Additionally, the average price for multifamily assets has increased over the last 2 years, along with demand. Pricing and demand are projected to continue this upward trend in both the short and long term. In August of last year alone, there were “new construction permits totaling over 57,000 units issued across the U.S.” for multifamily development. This is the highest demand for permits in a single month since June of 2015. The trend is not expected to slow anytime soon, as 450,000 multifamily units are projected to be developed in 2023-2024.

While the demand for multifamily continues to surge as the market recovers from the pandemic, increasing uncertainty around office and retail assets has prompted many to convert those existing buildings. Both office and retail assets have seen record low occupancy rates during the pandemic. As a result, we are seeing many of the distressed properties getting converted to multifamily. This conversion strategy allows investors to capitalize on rising rents and demand in the multifamily sector, without having to buy in at the price levels we are seeing in the residential market. This trend has created a significant opportunity for developers and investors, as “renovations could cost about 30% to 40% less than new construction for the same number of units.” Not only are investors saving on construction costs, but they are also able to buy these distressed buildings at significantly lower prices than comparable existing multifamily properties in the same markets. Multifamily developers have experienced many challenges throughout the pandemic, especially regarding construction costs. These challenges and specifically the increased costs have made it difficult for individuals to start investing in the multifamily space, making the conversion strategy that much more attractive. 

While multifamily investors key in on the conversion of commercial assets to multifamily given current market conditions and compressing cap rates, current property owners are able to take advantage by capitalizing on the current borrower/sponsor-friendly state of the capital markets. As cap rates compress, property owners/sponsors can get significantly more attractive debt, whether it be construction, bridge, Mezz, or permanent financing. “Multifamily cap-rate compression averaged 31 basis points in infill markets and 41 basis points in suburban markets” (ADG Multifamily). With market prices at all-time highs and the gradual increase we’ve seen in rental revenue due to record demand, it is the optimal time to get financing for a new project, refinance your existing debt, or recapitalize your equity. Investors have significant dry powder ready to be deployed in the multifamily space, whether it be a conversion or ground-up development. Meanwhile, banks, debt funds, and insurance companies aggressively look to deploy capital in both areas at rates lower than any other asset class.

Lever Capital Partners has significant experience in the multifamily space and can assist you in securing any financing needs for your next project. Whether you own an existing multifamily property and are looking to refinance or recapitalize, or you are a developer looking for construction financing for asset conversion or ground-up development, we have the resources and experience to get you what you need. We pride ourselves in our ability to bring clients a range of financing options that reflect only the best that the market has to offer.

Sources:

https://www.bisnow.com/national/news/commercial-real-estate/peter-linneman-walkerdunlop-walker-webcast-110461

https://www.bisnow.com/national/news/multifamily/apartment-demand-all-time-high-construction-tries-catching-up-110465

https://www.bisnow.com/national/news/multifamily/record-number-of-commercial-spaces-converted-into-apartments-this-year-110453