Big mixed-use down. Sales up. The changing face of multifamily amid a pandemic.
Big mixed-use down. Sales up. Experts discuss the changing face of multifamily amid a pandemic.
The Washington Business Journal recently hosted a virtual panel discussion with three industry leaders, experts in the fields of design, development and leasing, who spoke about how the multifamily market looks now, and what to expect going forward.
Alysha Buck, Senior Associate, Cooper Carry
Clint Mann, President, Urban Pace
Aakash Thakkar, Executive Vice President of Acquisition and Development, EYA LLC
What are you seeing in the pace of leasing activity?
Clint Mann: I think there were a lot of concerns early on about rent roll, collecting rents, and what we were going to see as far as delinquency. We did see a lot of that in Class A multifamily rentals here in the District, but what we’ve seen increasingly is vacancies go up. That has been a challenge. Some of the projects that we work on have a lot of amenities, a rich package — that was a real draw for people and a reason why people were choosing to live in those locations. Most of these amenities are closed, or at limited capacity, and it’s difficult for people to justify those huge rent premiums when they know they’re not going to be able to take advantage of the pool or some of the programming activities that come as part of living in that community.
Aakash Thakkar: Anecdotally, more than directly with our business, what we’re hearing and understanding is that vacancies are higher than expected in typical times, and as a result of that, rents are being pushed down. If there are less folks interested in a set number of apartments, the price for those apartments goes down. I think that’s a phenomenon that the landlords are seeing throughout the region.
What are you seeing in for-sale, especially as interest rates have fallen, and where do you see it going?
Thakkar: We’re surprised in terms of the strength of sales that we’re seeing. We sell projects in D.C., Maryland and Virginia. Interest rates are a historically low 3% for a 30-year fixed. That alone doesn’t typically pull people into the market, though. One would have thought at the start of this pandemic that there’d be concern around job loss and permanence, and therefore a reluctance to maybe make large life decisions. What we’re in fact seeing is, maybe a tale of two different product types, but also a tale of where a customer fits in the spectrum of job security.
In the D.C. region, you have a fair amount of government jobs and have a fair amount of technology jobs, a fair amount of white-collar jobs. For that group of folks who see the D.C. region as their longtime home, or their five- to seven-year home, buying with a 3% interest rate, and frankly having a little bit more flexibility in terms of what is out there, it’s making people make the decision maybe even more quickly than had the pandemic not hit. You may live in an apartment in Columbia Heights today, a young family or an individual and say, “Gosh, given everything that’s going on in close quarters in an apartment, given that I have my job, let’s go ahead and take the plunge.”
What we’re seeing is that fairly steady pace of selling homes, and we’d anticipate there’s probably some amount of pent up demand for the couple of months where the market was frozen, and we’re probably still seeing some of that activity.
Mann: I sit on the leadership team for Long & Foster so I get to see not only what’s happening in the new construction world, but what’s happening in the broader general brokerage world. Through the pandemic, we were seeing sales volume down by around 40%. I know early on everyone was talking about the fundamentals of the D.C. market and how we felt that when we came out of this pandemic, we would be resilient and we were hopeful that we will see a lot of the activity. It’s actually surprising how resilient the market has been. The D.C. market as of the end of July was down only about 3.9% on total sales volume, year over year. We project that we will exceed sales volume from 2019 before the end of the summer. That’s really remarkable given where we were just a few months ago.
What I would say is, all this activity you’re seeing right now in the market, we’re seeing most of that concentrated on immediate inventory. People that are moving because they need to for whatever reason, whether they’re relocating, whether they need a larger house, whether they need to downsize, whether they want to take advantage of that low-interest rate. There’s an immediacy to that.
What are you seeing in terms of your development pipeline?
Alysha Buck: We did absolutely see a little bit of a blip right at the beginning of the pandemic — just so much uncertainty. We had one or two projects that temporarily went on hold, just folks who weren’t super confident and weren’t sure how this was all going to play out. Since then, those two projects have come back and we have seen a pretty dramatic flood of new multifamily work coming in. With the larger projects, it’s sometimes 24, 36, 48 months that people are looking out when those things start to really hit our front door. It’s a longer-term projection, but it does seem like folks have a lot more confidence now than they did just a few months ago.
Thakkar: As a company, we are pursuing more of those for-sale types of projects and moving them forward in a rapid clip, given what we’re seeing in the market. What I will say is the large-scale mixed-use projects with retail, with hotel, with office and other asset classes have really been challenged by Covid. We see firms continuing to design them. I’m suspect of whether or not projects like that can and will be financed and actually break ground in the next 12 to 18 months.
If you’re doing 150,000 square feet of retail, are you now doing a grocery store and maybe 30,000, so you’re cutting that in half? What are hotels going to look like? What is office space going to look like? There’s so many asset classes, larger mixed-use projects, that are affected that I think it’ll be tough for those large mixed-use projects to advance in the short term.
Buck: We are absolutely sensing a shift in square footage, certain asset classes start to ebb and flow across our different market sectors. And as office and retail become a little more uncertain, multifamily sort of rises up and fills in from a square footage standpoint.
What are you doing to pivot on some of those larger mixed-use projects given the challenges?
Buck: We think a lot about retail specifically at the base of a multifamily product — that has been a really successful combination for us in the past. There had been a shift that was starting to take place — it started with hospitality — to where instead of having an internal restaurant and internal amenity services, they were starting to flip those and bring third-party restaurants at the base of the hotels that could then be shared. They’re open to the public. They’re activated more by the public. We started to see that shift a little bit into the multifamily realm, to where maybe it’s your fitness center that becomes a third-party fitness tenant at the base of the building, or maybe it’s coworking. The Foundry project out in Alexandria is a perfect example of that, where that was designed with a third-party coworking space down at street level.
Thakkar: Our stance, from projects that we’re working on ourselves and the mixed-use space, is that right now, unfortunately, the pause button is probably the right call because it’s really hard to anticipate what retail is going to look like. I would say that to the extent developers, owners, the equity investors have the ability to press pause because they don’t have cranes in the sky, that the smart move in our mind is to do that. See where the market takes us. Hopefully, the country gets a better handle on the pandemic situation. And then quarter one of next year, we have a little bit more visibility in the future.
Mann: Those pure residential projects that deliver in the next 24 to 36 months — by a lot of measures, they win by default. There’s a lack of inventory in the market and if you can deliver homes during that time period, where a lot of other projects are pushing off in a market that’s already supply-constrained and all of these challenges, I think you’re going to win.
Before the pandemic, there was such an emphasis or a shift toward amenities, particularly in common areas. How has the pandemic changed that?
Buck: The past five or so years, we’ve been talking about the amenities arms race, where every property is trying to one-up the next and you have to have all the features, plus a new one. That has started to die off a little bit. I think we hit critical mass with the square footage and the cost of construction that it’s taking to build those spaces out.
Now, in some cases, the location itself, the urban environment that you’re placing a building into, can be the amenity. If you’ve got access to the retailers, the restaurants, the fitness, entertainment — if that’s in the environment surrounding your building, there’s less pressure to provide that within the footprint itself, but that’s not always the case. If you’re out a little bit farther out into a town center or further out into the suburban areas, you’ve got to provide some level of communal gathering within the property itself.
I think there are two big takeaways that we’re starting to see with how those amenity spaces can shift coming out of the pandemic. The first is obviously social distancing. That’s an immediate need. For a long time, we had this trend, it was like the family-style feeding. It was inspired by Starbucks and the Apple Store. That’s where the big family-style table came from, and we have that in a lot of our multifamily properties. This may be the death of the family-style table. I think we’re going to see a lot more intimate spaces designed into buildings moving forward.
I’d say the second big takeaway is providing space for the work from home or co-working environment in the amenity package. Especially now, there was already a trend toward remote work for a lot of companies, but the pandemic forced us to prove that it’s a method that many companies can actually continue to utilize moving forward. I think a lot of people have been craving that flexibility. Even if it’s not full-time working from home, I think a lot of folks will want to continue at least a couple days a week for the very long term.
Having spaces inside the building, and not just inside your unit — having spaces out in the public areas. We’ve got dedicated conference rooms that people can reserve. We’ve actually been hearing from some of our property management companies that we work with, that the demand has been so high for these conference rooms, that can be reserved in specific properties, that they’re not even renting them out just on an hourly basis but they’re starting to do longer term. It’s almost folded into the lease for the apartment itself, to where somebody knows that they’re going to have a work-from-home scenario for the longer term.
Thakkar: To the extent you can make your outdoor spaces more functional, more comfortable for folks to work from or hang out from, and to be less susceptible to the seasons. If you can insert a fire pit and heaters and to the extent you can get and keep folks outdoors, that’s a trend even with retail that we were seeing well before the pandemic. Also, we’ve always had a desk in an office space, but to be candid, it was probably an afterthought to the living space because you think of a home as a place where you predominantly live, not necessarily work. But really showing folks what they might be able to do in a home that is more multifaceted.
Mann: People are looking for more space, more rooms, outdoor space. However, budgets haven’t changed. They’re now looking for different locations to overcome that. A great example of that is what we’re working on at the Parks at Walter Reed, which is in upper Northwest D.C. We’ve seen a shift over the last probably 60 to 90 days where we’re seeing a lot more consumers looking up there who otherwise had been looking at more centralized locations like Shaw, NoMa, the U Street corridor or Logan Circle.
What are some features that are being incorporated into design for safety and health?
Buck: There are absolutely a lot of ways to amp up your HVAC system to reduce the spread of disease. I think there’s some uncertainty still about whether or not renters will be willing to pay for increased HVAC moving forward and I don’t know that we necessarily have any built examples in the market yet. This all hit us pretty fast and projects take a long time to get built. There’s not really any solid data to prove that yet.
Are people rethinking densification and how is that affecting submarkets? Is D.C. losing its luster when it comes to multifamily?
Thakkar: D.C., as a whole, in my view, is not at all losing luster. In the shorter run, these inner ring suburbs and the outer rings of the District may become a little bit more popular. The good news might be that they may revitalize the Georgia Avenue corridor or the Northeast corridor in Fort Totten or Michigan Park. In our case, they may revitalize a little more quickly but in the long run, I suggest that a city like D.C., that has the diversity of people, the diversity of jobs, the diversity of incomes, will thrive.
What changes must local cities make to be able to bring the amount of affordable housing that this region still very much needs in this environment?
Thakkar: Very simply put, we have, in some cases, arcane, single-family zoning requirements. The result is we have a lack of supply and tenant demand. The way to turn that on its head is to allow the development community to build more — I would argue much more than we’re building today. Because if you put a lot more of any product into a market, the price will naturally go down. Then, if the District or surrounding jurisdictions will say — and a lot of them are already doing this — you have to build a portion of that as affordable housing. Then you have more market-rate housing. You have a good bit more affordable housing. The development community will do it.
What are you seeing in the luxury end of the market?
Mann: It’s been actually really interesting. Over probably the last 30 days, we’ve seen an increase in demand for luxury products in the city, in the surrounding suburbs. I’m not exactly sure why that is. If you look in Montgomery County, you look elsewhere, people were having challenges selling their big single-family home that maybe wasn’t as desirable for a period of time. We see those home sales increasing. People who maybe were trapped in their home, they had a buyer ready, willing and able to allow them to move on in their journey.
Is the pandemic changing the equation for adaptive reuse of office buildings as multifamily?
Buck: Office to residential, and retail mall properties to residential, had been the norm. But looking forward, the hospitality industry is taking such a major blow through this pandemic. I think there’s going to be tremendous opportunity there. Hotel footprints actually have a lot of similarities with multifamily, and student housing even more so. Student housing may be a really good fit for those buildings. We actually have an understanding that this may be the next wave that’s going to be coming our way.
Thakkar: I’ll add maybe one additional trend that we’re seeing is the conversion of suburban office parks to more mixed-use environments or maybe now more residential environments. We’ve got a project by Montgomery Mall, literally called Montgomery Row, that’s been built and finished in the midst of an office park.
How has Covid impacted your marketing, and thus your ability to attract new residents ?
Mann: I think in new construction, we’re uniquely positioned to be able to sell homes remotely. We’ve been investing in virtual reality technology for a long time and being able to show someone something before the building is actually built.
What’s changed in terms of multifamily development activity around new transit that’s going to be coming online — Silver Line second phase, Purple Line?
Thakkar: We do see public transportation, Silver Line, Purple Line, coming back, and being sort of a major contributor to the region. With regard to Purple Line, we have looked at projects on the Purple Line, and we’re certain it will happen. It looks like it’s going to take a good bit longer than we had expected.
What will be the impact of this year’s election on multifamily development, or on the projects in your pipeline?
Mann: The election can deliver more certainty to the region and the country, particularly in our field. We’re sort of placing a bet, if you will, on how a project might perform a year or two or three years from now, right? Certainty in our region, whether it be certainty around interest rates, certainty around controlling the pandemic, certainty about regulations, they’re all important.
Whoever wins, when you bring in a new administration, we tend to see more activity because there’s a little bit more change, and we tend to see more people who are coming in for a new administration renting.
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