Never underestimate multifamily. Having effectively adapted through COVID-19 disruptions and outperforming most other CRE sectors during a turbulent 2020, multifamily is expected to not only return to pre-pandemic vacancy levels, but also see a net increase in rents over the coming year, according to CBRE’s 2021 U.S. Real Estate Market Outlook for Multifamily.
And while several longstanding truths remain – an urban lifestyle still appeals to many renters and national demand for attainable workforce housing continues to grow – changes are afoot as the industry evolves to meet new renter priorities.
According to Ben Creamer, founder and managing broker of Downtown Apartment Company, a full-service brokerage specializing in luxury apartments in Chicago, flexibility is key to navigating an ever-changing rental landscape. “It’s all about generating loyalty and attracting new tenants, so renters are back in the driver’s seat,” said Creamer. “Lease conditions that were once set in stone, such as the traditional 12-month lease, are now negotiable, giving renters more leeway to customize terms to better accommodate their needs.”
Multifamily developers are also modifying buildings to meet renters’ ever-evolving expectations, even making changes to new projects during construction. “Some apartment communities have retrofitted empty units into offices, while others have turned theaters into conference rooms or divided large common areas into smaller private spaces,” said Creamer. “It’s inspiring to see so much innovation and resiliency in the apartment market.”
Here are six of the top trends expected to impact multifamily real estate in 2021, according to leading Midwest experts.
- Bullish on Biophilia
- Don’t Box Me In
- Student Housing Keeps Heads in Beds, Even When Classrooms Are Empty
- Housing Affordability Takes Center Stage
- Middle-Market Money Moves
- Permanent Pandemic Pivots
Bullish on Biophilia
With the directive this year that the great outdoors was the safest place to be active and gather, Americans gained a deeper appreciation and desire for communing with – and connecting to – nature. All the while, sales surged on anything that let people stay outside longer, from trampolines and road bikes to fire pits and string lights. Multifamily developers received the memo, so look for an even stronger emphasis moving forward on building designs, floor plans and amenities that help bring the outdoors in.
Optima, Inc. has long made biophilic design a hallmark of its work, but it’s getting even greener with three new projects. At Optima Kierland, its four-building oasis of 363 apartments and 433 condominiums in Scottsdale, Ariz., a dramatic vertical landscaping system creates a lush view from each resident’s terrace, and 100% underground parking allows for an additional 5.5 acres of courtyards throughout the community. In the Chicago area, its under-construction Optima Lakeview development features a distinctive landscaped interior atrium that will run through the building’s seven-story core and bring light into both the residential and retail areas of the building. And at its recently announced rental project in downtown Wilmette, Ill., Optima will make the Midwest debut of its signature vertical landscaping model from Arizona, including hand-selected plants that will stay green year-round.“With more people spending time at home, it’s important to thoughtfully create a variety of spaces that allow residents to find inspiration in their natural surroundings and recharge,” said David Hovey Jr., AIA, president of Optima, Inc. “And because we serve as both architect and developer on our projects, it makes it easier to prioritize these green spaces, which not only improve the air quality for our residents, but also those living near our buildings, as vertical gardens filter pollutants and carbon dioxide out of the air.”
K. Tyler, principal and head of interior design with Morgante Wilson Architects, agrees that adding natural elements is an especially important consideration for properties in areas with limited green space. In designing the interiors for Westerly, a new development by Fifield Cos. in Chicago’s River West neighborhood, Tyler and her team contrasted the property’s urban setting and industrial flavor by infusing common areas and amenities with lush greenery – including wall installations of foliage and planting boxes in the penthouse-level party room and dining space – and natural materials like sculpted wood. “The greenery especially contributes to the feel of the relaxing, calm sanctuary we strove to create, which is so important to today’s renters who want to come home and escape a bit from the city,” said Tyler.
Large outdoor terraces and floor-to-ceiling windows are another way to bridge indoor and outdoor spaces, making abundant natural light and sky and treetop views part of the everyday living experience. At Parkline Chicago, a luxury tower in Chicago’s Loop with 24 condominiums featuring terraces and 190 apartments, a glass facade easily draws light into the center of each home, often illuminating the entire residence.
“There’s an intentional fluidity between the indoor and outdoor spaces of Parkline’s units, as we didn’t want residents to only feel connected to natural surroundings if they were on a terrace,” said Thomas Roszak, FAIA, president of Parkline developer Moceri + Roszak. “We know, especially from this past year, that people value nature more than ever, so we want them to embrace it as much as they can, which is easy to do when a view from this building means looking onto the beautifully landscaped Millennium Park and Lake Michigan.”
Don’t Box Me In
While most multifamily projects establish their amenity spaces well before ground is broken to streamline financing, marketing and construction, there are a handful of firms challenging this norm by installing undefined amenity spaces with positive results.
For example, when James McHugh Construction Co. started work in December 2016 on the 83-story NEMA Chicago, the city’s tallest rental tower, it “white boxed” a portion of the building’s 48th-floor amenity space – essentially leaving it in a raw, shell-like state without interior walls and finishes – while it completed the rest of the building. The “white box” space had been tentatively earmarked for a yoga studio, but after observing the popularity of NEMA’s 16th-floor coworking area, owner Crescent Heights decided to finish the area with six executive boardrooms, which McHugh built out in 2020, just in time for residents who found themselves working from home during the pandemic.
“Tastes and trends can change dramatically between groundbreaking and first move-ins,” said David Steffenhagen, senior project manager for McHugh Construction. “For supertall projects, which can take three to four years to complete, it makes sense that more developers are pushing the envelope on just how long they can wait before making a decision. Obviously, the earlier we can order materials and schedule labor, the better is it for the budget. But it would be more costly to finish a space that had to be renovated just months later. Given the events of this past year, we can expect to see even more projects wait until the last minute to finalize details so we are as close as possible to constructing in real time to meet residents’ current needs.”
Taking a slight twist on this trend was developer Optima, Inc., which smartly built “just-in-case” space into its massive 1.5 acres of amenities at Optima Signature, its 490-unit rental tower in downtown Chicago. By creating extra-large open areas that weaved throughout the building’s four amenity floors, Optima was well prepared to spread out its fitness equipment to adhere to social distancing guidelines without reducing the number of stations. The padded space paid off so well that Optima plans to factor in flexibility at its new projects in Chicago’s Lakeview neighborhood and Wilmette, Ill., to allow for any changes the future may hold.
“Optima believes exceptional design goes well beyond a building’s aesthetics; it’s also about future-proofing a building to enhance the day-to-day lives of our residents and their families,” said David Hovey Sr., CEO of Optima, Inc.
By interpreting meticulous research, commercial interior design firm Mary Cook Associates knows how and when – often down to the hour – residents are using the common spaces of the buildings it designs, which is why some of its current conversations with developers focus on programming spaces with flexibility and adaptability so that intended use isn’t as stringent as in previous years.
“With a comprehensive understanding of who the target residents are and how their priorities may change, we are able to create spaces that serve one purpose today and another tomorrow,” said Mary Cook, founder and president of Mary Cook Associates. “By leaning into the deep insights provided by psychographics to guide our design, we help developers get it right the first time and not have to ‘fix’ it down the line. We build flexibility into spaces upfront by using movable partition walls, retractable glass doors and adaptable seating configurations to ensure a work-from-home lounge can transition into a cocktail bar at night, or a virtual conference room can transform into a rentable private dining space. This puts our clients in a much better position if they ever need to change course with a space.”
Student Housing Keeps Heads in Beds, Even When Classrooms Are Empty
After years of exponential growth, the student housing sector faced significant headwinds in 2020 as COVID-19 prompted the shutdown of college campuses across the country. And while some predicted many beds would sit empty going into the 2020-21 academic year, off-campus communities in the right locations with the right designs not only saw students return, but in some cases, come back in higher numbers as they sought to preserve as much of the college experience as possible.
“2020 was a validation of the model we introduced to the market more than 15 years ago, underscoring how highly amenitized, pedestrian-to-campus housing remains in high demand regardless of how classes are delivered,” said Michael Hales, president of student living at CA Ventures. “CA Student Living successfully delivered more than 3,500 beds in 2020 and plans to deliver upwards of 2,200 for the 2021-22 school year, while also selectively expanding its portfolio via acquisitions. Our 2020 leasing numbers were approximately 4% ahead of 2019, and rent collections have remained strong, so we’re as bullish about the sector as we’ve ever been. If anything, COVID-19 highlighted the shortcomings of traditional dorms, many of which are older, more crowded and lacking the amenities today’s students seek. Coming out of the pandemic, we expect large Tier 1 universities will expand their enrollment base without having to make significant investments in infrastructure by offering a combination of virtual and in-person coursework – a trend that will create additional demand for off-campus housing.”
Commercial interior design firm Mary Cook Associates agrees student housing will remain in high demand in 2021 and beyond. And while the pandemic has changed what students – and their parents – might prioritize in an apartment search, MCA is careful not to stray too far from a formula that has proven successful to date.
“We can’t design tomorrow’s communities based solely on today’s pandemic, but we are taking lessons learned in 2020 and applying them to our future projects,” said Mary Cook, founder and president of Mary Cook Associates. “Safety has always been top of mind in student living. What’s changed is how that sense of security is conveyed through design. As a result, we are pivoting to incorporate touchless entries and faucets, air filtration systems, and antibacterial textiles and surfaces in the communities we are currently designing, recognizing the important role these features will play in leasing going forward.”
Beyond paying closer attention to safety and wellness, expect students to consider how their living environment supports them both socially and academically, especially if virtual coursework becomes a more standard offering, according to Ben Kasdan, principal in the Tysons, Va., office of KTGY Architecture + Planning, which designs both on-campus and off-campus student housing communities.
“Students are very in tune with what they need to be successful, especially after having spent so much time in a remote-learning environment,” said Kasdan. “We’re looking at everything from how units are designed and oriented to one another, to how common areas can strike more of a balance between work and play. Pool decks and game rooms are still popular, but students who spend more of their day learning from home will also need adequate study areas that can accommodate both individual and group work.”
Housing Affordability Takes Center Stage
Demand for attainably priced rental housing was high before the pandemic began and has only increased since, making workforce and affordable housing even more of a focus for developers in 2021.
Exemplifying this is CRG, the real estate development and investment arm of Chicago-based Clayco, which recently launched a new $1 billion national residential development strategy that prioritizes Class B workforce housing in first- and second-tier suburbs across the country, aimed at people earning between 80% to 120% of U.S. Average Median Income. “We call this building for the masses rather than the classes,” said CRG Managing Partner J.J. Smith, who is driving the initiative. “New-construction multifamily has been missing for middle-income residents for decades because it has been too expensive to build and net a profit. But land prices have been falling, and at CRG, our vertically integrated platform with Clayco provides cost efficiencies that make these essential projects viable.”
To get workforce projects to pencil out, developers are also evaluating alternative materials and methods that take into account regional considerations. “In high-cost coastal markets, for example, one of the most significant new ways of controlling the bottom line is modular construction, which addresses both design and budget challenges,” said Mark Oberholzer, associate principal at KTGY Architecture + Planning. “We can design a limited number of modular units and deploy these same units across multiple projects, providing our clients with a more competitive design cost.”
Architecture firm Lucien Lagrange Studio, which is creating workforce housing at Pulelehua Residential, a master-planned community in Maui, Hawaii, also manages the cost of units through its design approach. “For Pulelehua, we created a modularized kitchen concept that fits on one back wall, paired with a moveable island,” said My-Nga Lam, design principal with the firm. “It is more cost-effective because of its compact design and minimal details, but it also creates a clean backdrop to the living area that ultimately gives the resident more flexibility in how they use the space.” Lam added that the units’ exteriors incorporate materials like stucco that are commonly used and familiar to the local construction labor market, which also keeps budgets in check.
One major trend making affordable housing developments more feasible are public-private partnerships where developers, investors and municipalities join forces to create housing for low-income residents. Chicago-based Evergreen Real Estate Group recently completed two co-located public library and senior housing projects in Chicago that bring both services and newly constructed affordable housing to neighborhoods. The firm’s current projects include Ravenswood Senior Living, which is transforming a vacant Chicago hospital into a community offering both independent and supportive living for low-income seniors, and Evanston Senior Housing, a new suburban community of affordable senior apartments adjacent to an existing adult day services center where residents will enjoy socialization and support. “We are honored to pioneer these new models and innovative partnerships, which demonstrate the value of providing public services alongside new housing,” said Steve Rappin, president of Evergreen Real Estate Group.
Middle-Market Money Moves
While the Mortgage Bankers Association reported loans for multifamily properties were down 31% in third-quarter 2020 as compared to 2019, not all multifamily lenders and investors were sitting on the sidelines. Middle-market properties, generally between 20-200 units, continue to trade hands as some larger players are turning to the suburbs as well as secondary and tertiary markets where less development has sustained higher rents and occupancies.
One brokerage firm that can testify to the middle market’s resiliency in 2020 is Interra Realty, which was nearing $270 million in transactions at year-end, up from $200 million in 2019. “We expect cap rate compression to continue for middle-market multifamily properties as investors seek stability – housing is a fundamental need, so there’s always demand, especially at more attainable price points – and take advantage of historically low interest rates,” said Jon Morgan, co-founder and managing principal of Interra. The company’s new listings include Panton Mill Station, a 100-unit luxury apartment building in South Elgin, Ill., a suburb of Chicago. Delivered in February 2020, it was more than 72% leased by November, achieving both strong leasing velocity and rents per square foot in the current climate.
Looking outside of downtown cores for portfolio plays is a sentiment many hold given the current climate. “Urban centers in major metros are hurting, with falling rents and rising concessions and vacancies, although most of these assets were conservatively leveraged so owners will be able to hold on through the downturn,” said Blas Puzon, chief investment officer of Chicago-based Draper and Kramer, Incorporated. “So, a natural option for those needing to place capital is to look at secondary or tertiary markets where rents are historically less volatile. For properties that are trading, we are seeing little downward pressure on values because of low interest rates, an abundance of capital seeking new investments and a general belief that rents will rebound quickly.”
“Stabilized multifamily remains one of the most desirable asset classes for lenders, perhaps second only to a geographically diverse industrial logistics portfolio,” added Matt Wurtzebach, senior vice president with Draper and Kramer’s commercial finance group. “Rates are the lowest they have ever been, with most 10-year loans executing in the 2.5% to 3% range, and lower-leverage loans below 2.25%. Lenders are more conservative in their underwriting, and some, including the agencies, still have temporary COVID reserves, but the low rates are incredibly compelling for making some strategic and opportunistic buys in new markets. Given the state of the economy and the fact that the full extent of the COVID-induced damage is not yet known, we expect rates to be low for an extended period and broadly in line with the past several years.”
Permanent Pandemic Pivots
While the early days of the pandemic created uncertainly and struggles for the multifamily industry, the number of occupied U.S. apartments increased by nearly 150,000 between the second and third quarters, according to a report from RealPage.
The immediate responsiveness of developers, owners and property managers who identified creative ways to attract new renters and keep current residents safe and happy may have been a contributing factor to this rapid rebound. And many in the industry expect some of these changes to stay for the long term.
Draper and Kramer, Incorporated, has seen an accelerated adoption of virtual property tours as more of the apartment search process moves online. “COVID-19 really hit the fast-forward button and made everyone get comfortable with these tools and realize their value even after the pandemic,” said James Love, vice president of marketing and brand for Draper and Kramer. “Prospective renters have experienced firsthand that virtual tours let them quickly vet properties in advance, reviewing a larger pool of buildings before selecting just a few to tour in person.”
Jon Schneider, senior vice president at developer Fifield Cos., credits the firm’s already robust portfolio of digital assets in easing the challenges of opening two new buildings during the pandemic: Logan Apartments and Westerly in Chicago. “The pandemic raised the bar on the virtual touring experience, and we found that having a library of high-quality images – well beyond photos of models and amenity spaces – was essential,” said Schneider. “In addition to videos of every unit in our newest buildings, we’ve incorporated virtual tours of residences that are digitally staged, so prospects can experience the actual space they’ll call home.”
While bringing in new residents is critical, keeping current ones happy – and willing to renew their leases – is more important than ever. Doing so by building community is part of the ethos at Porte, a new 586-unit rental community in Chicago’s West Loop developed by Lendlease and The John Buck Company, with partner Intercontinental Real Estate Corporation. “Our property management team adapted services to meet safety protocols outlined by the city, shifting in-person gatherings to outdoor and virtual events, such as a movie night outside on our pool deck, a virtual book club and online fitness classes with partners like Lulafit,” said Ariana Rasansky, senior vice president of The John Buck Company. “These online events have been embraced by our residents and we expect they will continue even after the pandemic as an easy way to foster community connections.”
At 727 West Madison, the tallest tower in Chicago’s West Loop, property management identified ways to help residents stay connected with each other while supporting local businesses. For example, 727 serves as an outpost for free deliveries from a neighborhood health-focused restaurant, hosts a local food truck for grab-and-go events and is organizing a pick-up of sample boxes from a new deli. The building also partnered with a local firm to host a pop-up plant sale in the lobby and with a building resident for a pet portrait event. “One of the reasons our resident satisfaction is so high at 727 is our commitment to the West Loop neighborhood,” said Beth Argaman, general manager at 727 West Madison. “Our residents tell us we have risen to the challenge of coming up with very creative ideas that have helped maintain a sense of community during the pandemic, and they want them to remain a part of the 727 lifestyle for the long term.”