[co-author: Kitty Wallace]
Despite the move to the suburbs and falling rental rates, Allen Matkins / UCLA Anderson predicts that panelists in the California commercial real estate survey are optimistic about the next three years in the multi-family housing arena. Rental rates are expected to increase overall faster than the rate of inflation and vacancy rates are expected to decline by 2024. This optimism is caused both by the reopening of city amenities attracting people to apartments in the city. city and the start of the return to the office.
Multi-family housing industry leaders Kitty Wallace of Colliers International and John Condas of Allen Matkins discuss the future of this sector of the California commercial real estate market.
1. DESPITE SOME OF THE POPULATION MOVING TO SUBDIVIDED COMMUNITIES, DROP IN RENTAL RATES AND HIGH CONSTRUCTION COSTS, MULTI-FAMILY DEVELOPERS AND INVESTORS ARE STILL ON THE GROWTH IN THIS SECTOR LOOKING AT LEAST THREE YEARS. WHY IS THAT?
Wallace: Historically, California has been one of the top 10 markets, and although we have seen some unfortunate circumstances due to the pandemic, people are still hopeful. Investors, tenants and landlords think and plan strategically in advance based on the historical market and anticipated trends and future returns. At some point, COVID restrictions will be lifted. It is imperative that multi-family developers and investors take calculated action today.
Several factors play an important role in the development of this sector – many of which include high barriers to entry, diverse jobs, entertainment, weather conditions and a tenant base that tolerates high tolerance for rising rents. . Given this, people are prepared to invest and forecast positively based on California’s track record of above market appreciation. While most of California is expected to experience stable net growth within a year or two, in the years ahead, they are optimistic about the historic market increments of last year’s rent increases. What we will see once the economy fully reopens is a go-to place to “park money and profits.” With the diversity that we have in our employment sectors, our population will experience significant growth. This not only represents a great opportunity for investors and developers to get started, but also highlights several trends that we are witnessing. Wood prices have gone up. There is also an escalation in labor costs. If you are planning to build properties, it makes sense to build in areas where you will get the best rents for your fixed costs, further reinforcing the need to sow those development dollars into high-end markets now.
Conda: There is plenty of expert data supporting the claim that even with these factors mentioned above, California still lags behind in the production of residential units. Our clients agree with this point of view; job creation far exceeded the production of new housing. We saw a torrent of new activity, which seems to be in part due to the reopening of California on June 15th. Our customers believe the worst impacts of COVID are behind us, and as we return to a more normal situation, the previous pent-up, pre-COVID demand will return.
2. WITH A LARGE MAJORITY OF SURVEY PARTICIPANTS STILL ADVANCE MULTI-FAMILY PROJECTS IN THE COMING YEARS, ESPECIALLY IN SOUTHERN CALIFORNIA, WHAT DEVELOPMENTS OR NEW CONSIDERATIONS DO DEVELOPERS CONSIDER FOR THEIR OWNERS? RELATED TO COVID OR OTHER?
Wallace: We are seeing a continuation and improvement of common trends such as automation and installation of various kinds of technology. From Nest thermostats to keyless entry and the expansion of Amazon lockers, developers are making strides to ensure their tenants live in highly appointed units. Now there are cool additions like Stockwell, a popular smart store that offers a full range of services, including lunch on the go or day-to-day retail supplies. Improved Wi-Fi options are now mandatory. The inclusion of these types of additions not only provides a benefit to the tenant but also provides additional income to the landlord.
Yoga studios and gymnasiums have grown considerably and are sometimes relocated outside. We recognize the value of health and have learned through the COVID pandemic that in California, exercising outside is not only doable but preferable in many cases. Often we are limited on space. In some cases, developers are reinventing approaches by looking at other health and wellness options with the inclusion of pickleball courts and swimming pools. The use of outdoor space has exploded, not least because these spaces are difficult to find in major metropolitan areas. Tenants want user-friendly options in addition to fitness centers which include play areas with bocci or cornhole and inviting gardens with herbs and fruit trees. COVID-19 encourages developers to operate with a greater focus on the tenant and their well-being. Manufacturing-wise, the new elevators include COVID filtration options to help keep our communities safe, with the developers also looking to improve airflow in hallways and common areas.
Conda: Our customers are integrating equipment and modifications to existing equipment to address concerns related to COVID. These amenities include more outdoor spaces, using Zoom to host virtual cocktail tastings or cooking classes, bookable meditation rooms and distance training equipment. They implement cleaning and disinfection practices in fitness centers and co-working spaces on site. Lounges, pavilions and other areas are now reallocated for home schooling and remote working. Our customers are investing in more mobile furniture, which allows them to place seating, dining, and study / work areas six feet or more apart. Partitions are installed in coworking spaces to help tenants feel safe. Multi-bedroom units are now advertised as one-bedroom apartments with home offices or distance learning spaces, instead of the traditional marketing for 2 or 3 bedroom apartments. One bedroom apartments present a creative workspace / space where residents can make a living from the comfort of their own homes as a significant number of people now work from home.
3. WHERE WILL THE NEXT “HOT SPOTS” FOR MULTI-FAMILY DEVELOPMENT BE, IF NOT IN THE LARGE MARKETS THAT ARE ALREADY SATURED WITH HIGH-END CONDOMINIUMS? WILL PEOPLE CONTINUE TO LOOK FOR LESS DENSITY PLACES?
Wallace: While hot spots will continue to be regions with high barriers to entry, the Inland Empire is expected to thrive due to the port and logistics market as well as increased warehouse development. Institutional clients are now investing their capital in this landmark development concept. There is a plethora of population growth in the Inner Empire due to the constant growth in rents. For 11 years, they have observed a steady growth of 3% in rents. Historically, this market has only seen hundreds of new units come onto the market. Now we are expected to have close to 2,000 units built over the next year. Although many rental markets in the state were affected by the pandemic, San Diego was another hot spot, closely followed by the Orange County and Sacramento markets, as those markets were more lenient with mandates. mask, school openings and the return to business.
Some tenants and investors are flocking to areas outside of the state of Montana, Idaho, Colorado, Arizona, or even Utah. Some due to the cost of real estate development, but many due to restrictions imposed by the State of California. As some have left, many are coming back because there are better opportunities here; growth prospects are better. It’s definitely a guard change now with the demographics of our tenants and investors, but we will see investors using their capital because of the potential for profit. Our markets have maintained a constant vacancy rate of 5%, which means our rents are increasing. Over the next three years, it is expected to skyrocket. Right now, many rental markets are tight, so we are seeing relentless interest in these pockets.
Conda: Our clients are particularly optimistic about the development of multi-family projects in less dense suburban areas, such as the Inland Empire. One of the reasons the Inland Empire appeals to our customers is the enormous employment growth that has occurred there, driven by the number of warehouses and logistics facilities that have been developed. Land prices are also lower there than in more urbanized areas. These projects are developed at lower densities than in urban areas, which makes it possible to use less expensive types of construction. Additionally, we have seen a lot of new development activity in Orange County outside of the coastal areas. Our customers also understand that the regulatory pendulum has shifted to a more pro-housing lean, due to the passage of SB 330 by the California legislature, and extremely high Regional Housing Needs Allowance (RHNA) than local governments. have been awarded by various associations of governments. . State law requires cities and counties to demonstrate that these local governments have adequate land, zoned at appropriate densities, to meet their RHNA obligations. These high RHNA obligations will force local governments to develop or dezone properties to meet their respective RHNA obligations, making the award process safer and a little less risky.