Rental market pushing service, ‘community’

Except for a few pockets of ultra-luxury condo action—New York, San Francisco, and parts of Florida, Hawaii, and metro Washington, D.C.—today’s multifamily story is all about rentals. “The apartment sector has been a darling for investors over the past two years,” notes the Urban Land Institute in its recent Real Estate Consensus Forecast. Vacancy rates are at an enticing 5.0%, and rental rates should be up 5.0% this year, although ULI does forecast some slippage next year, to 4.0%.

“Investors continue to view apartments as a preferred asset class in today’s environment,” says Dale Connor, Lend Lease’s Managing Director, Project Management & Construction, Americas. He sees developers playing catch-up to meet the growing demand for apartments, especially in the top five rental markets: New York City, Washington, D.C., Boston, Chicago, and Los Angeles.

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Savvy market-rate developers are looking for locations around universities, innovation incubators, and teaching hospitals, says Ray Kimsey, AIA, LEED AP, President of Atlanta-based Niles Bolton Associates. Land that was once set aside for retail or office development is being looked at for multifamily, especially if served by urban transit.

“If you look at the hottest neighborhoods around Washington, D.C., Pittsburgh, or Baltimore, they all have an influx of Gen-Y people graduating and wanting to stay in that environment,” he says. Kimsey says there’s even a movement toward walk-up, garden-style apartments in some suburbs and second- and third-tier cities.

The use of urban infill sites is adding to the popularity of podium-style multifamily construction, says Mathew Dougherty, PE, Vice President with McShane Construction, Rosemont, Ill. “The podium ‘stacks’ uses vertically within the existing floor plate, thereby allowing a mixed format of ground-floor retail, parking floors, and residential floor plates,” he says.

According to John Lahey, AIA, Managing Principal at Chicago-based Solomon Cordwell Buenz Associates, the rental market is being shaped by two factors: service and community.

“Service” refers to the heightened demand for amenities: party rooms, surround-sound movie theaters, fully equipped fitness centers, mega-size video screens in common areas, computer golf games that let you play any course in the world, I-GO car rentals—even “restaurant days,” where a local restaurant comes in and sells takeout dinners one night a week.

There are even amenities for canine occupants. “People love their dogs,” says Lahey, so dog walks, dog parks, dog washing bays, and dog walking and grooming services are becoming de rigueur in many large (>400 units) complexes. “People want their lives to be easier,” he says. “They want to be taken care of.”

Tenants are demanding more green amenities, says Kimsey. “Expectations about energy conservation and sustainable features are now viewed as a basic right by many tenants,” he says. “If they lived in a LEED-certified residence hall in college they want a LEED apartment”—but not if it costs more than market rate.

“Community” refers to the renter’s need for connection, says Lahey. In past decades, apartment dwellers put a premium on privacy. Less so today. “A lot of people who move back into the city, they’re not confirmed urban dwellers, and they want to meet people,” he says. “The Starbucks in your building becomes the meeting place to get integrated into the larger community.” McShane’s Dougherty says wifi connectivity has become a given in new and renovated rental projects.

“The design must be hot,” says Kimsey. The units themselves may be “smaller, tighter,” but that means they must be more elegant and efficient, with open layouts and near-condo-like finishes. McShane’s Dougherty says granite countertops, stainless steel appliances, upgraded bathrooms, and high-quality flooring are expected, even in suburban garden apartments. Developers are increasingly concerned about sound attenuation, he says, so insulation choices, assembly details, and materials selection are crucial.

Looking ahead, SCB’s Lahey says that, unlike the condo market, apartment development needs to be left to the pros—firms like AMLI, Avalon Bay, Equity Residential, Forest City, The Habitat Company. “They have the track record, and they really do know what they’re doing,” he says.

“The money is out there,” says Kimsey, but it’s split between smaller projects being funded by S&Ls and smaller banks, and big projects attracting institutional and private-equity investors. Holding back the pent-up demand: anemic job creation, which limits new household formation.

Even with low mortgage rates, many potential buyers have become skittish about purchasing a home, says Lend Lease’s Connor. SCB’s Lahey cites mobility as another factor in rental’s favor, especially with the younger generation.

“People will like living closer in, and units will get bigger, something decent in size, and they’ll be willing to pay for it,” he says. “They’ll see a home as a place in which to live, not necessarily as an investment.” +

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