How is multifamily housing development changing in the era of remote work and escalating construction costs?
Members of several of ULI’s housing-related product councils in the United States, Europe, and Asia discuss the effects of the COVID-19 pandemic on housing choices, the challenges of dealing with construction cost escalations, strategies for streamlining building operations, amenities that appeal to today’s consumers, and other trends.
What lasting changes are the COVID-19 pandemic and the rise of remote work having on multifamily housing development?
Hilke Nijmeijer: We get that question a lot: are people now fleeing the larger cities to live in smaller cities or even rural areas? We carried out an analysis and found that urbanization is still going on, in terms of both population growth and household growth. There was a bit of stabilization because of less immigration during the height of the pandemic, but that’s changing back again. We still see demand for multifamily housing growing in the largest cities, and we expect that trend to continue. The same goes for smaller cities as well, where there may be even more room for capital growth.
Jeff Adler: There has been a profound change. Pre-COVID, there was a migration of people out of high-cost international gateway cities in places like California, the Northeast, and Chicago to southern and western states [and cities] like Texas, Charlotte, Austin, Orlando, and Miami. In those cities, urban areas grew and urbanized suburban nodes—“mini downtowns”—began cropping up. COVID-19 turbocharged movement to these cities. In 2021, rents shot up anywhere from 12 to 25 percent in some cities, from a national average of 15. Now the migration is still playing out, but it’s not as pronounced. We’re seeing a reevaluation of how often people need to be together versus how often they should be working remotely and, as a result, some of the affordability challenges that were concentrated only in international gateway cities have become more spread out.
Blake Olafson: Asia doesn’t really have multifamily development, except for Japan. At Asia Capital Real Estate, we’re building multifamily, but we’re relatively unique in that space. Traditionally, rental accommodations in Asia have been through individual owners renting condominiums, which accounts for about 95 percent of the whole rental market. Singapore opened its arms to expats impacted by COVID-19, particularly from China and Hong Kong, which has put upward pressure on rents, increases in the neighborhood of 30 percent. In Thailand, the recovery of the overall market has been slower because of COVID-19’s impact on tourism. However, occupancy rates in multifamily products are starting to increase as of mid-2022, as well as in serviced apartments and hotels.
Nicolas Bearelle: In Belgium, the definition of urban is expanding as smaller suburbs are becoming part of urban areas. People are still more attracted to the city, where we have cinemas and city life, but it’s becoming so expensive that younger people can’t afford it anymore, so they are going outside the core cities to cheaper suburban areas. Hopefully, these suburban places can attract more services, amenities, shops, bars, and restaurants.
How are developers contending with rising construction costs, especially in urban markets?
Adler: It’s very difficult. Construction costs have paced with rising rents, and now increased financing costs are an additional headwind. The emergence of single-family build-to-rent communities as a new asset subtype is one interesting response. It’s not huge right now—there are about 160,000 of these units completed or in some form of new supply—but a lot of capital is being deployed in it. There is a consumer need for it, but it only works where land is cheap enough, which is mostly at the fringes of metropolitan areas. And those projects are facing more scrutiny from local officials than they have in the past.
Bearelle: Construction prices are now extremely high. We stopped signing additional construction contracts several months ago because we couldn’t get fixed pricing. But the construction companies are coming back to us, and we’re negotiating again. Global prices for raw materials are dropping, so we see the market calming down. We have been able to raise selling prices to the same level as construction prices, so we haven’t had a decrease in our margin. There has been a steep decrease in volume of individual sales, however, because households are becoming more prudent. They see interest rates rising and mortgages becoming more expensive.
Nijmeijer: Developers are being squeezed. On the one hand, construction costs are rising due to high inflation and material costs, as well as higher ESG [environmental, social, and governance] and other requirements that come from governments and municipalities. On the other hand, interest rates are rising, putting downward pressure on investors’ returns. At the same time, there is also more pressure to provide affordable houses in urban markets. This is not an ideal combination. There comes a moment when there isn’t a business case to build or develop anymore, because prices are going down. That’s a challenge for not only investors, but also private individuals, who face increasing interest rates, which means sales to individuals will be more challenging in the future.
Olafson: Land costs in Asia are so high in major urban centers like Singapore and Hong Kong that construction costs are not as important as in other global cities. They are more like a rounding error. Land costs are probably 80 percent of the total budget for a new development. So if you have to pay 10 percent more for concrete, it really doesn’t matter, compared to other, cheaper land markets. Even so, we’re trying to figure out better ways to buy materials as we operate in markets with lower land costs. The supply chain disruption in China has impacted costs and the transportation of materials to the construction site.
What noteworthy strategies are owners/operators implementing to improve operational efficiencies?
Olafson: Using customer experience technologies helps streamline payments and interaction with building management staff and helps reduce maintenance costs. We use apps that allow tenants to request maintenance, so if something goes wrong with their air conditioning or their taps are leaking, they can go on the app and push a button, and it automatically sends the request to our engineering team. This allows us to keep on top of maintenance issues more quickly.
Adler: The introduction of the “chatbot” into the leasing flow has freed up enormous amounts of labor. Because of the labor shortage, automation tools like this are not taking away jobs, but allowing services to be provided. The adoption of smartphone technology has allowed for digital locks, automated lighting, and automated thermostats to be deployed with a certain level of rental premium. As for back-office efficiencies, removing paper from procurement processes has been a huge help. With multifamily housing, there are a lot of people involved, so reducing paperwork for making purchases and paying vendors allows the teams on the site to focus on building customer relationships and engage directly with consumers.
Nijmeijer: A lot of strategies of institutional investors are focused on providing affordable housing, especially for middle-income households. You see that across different players in different countries. In order to make the business case for affordable housing work, operations need to be organized efficiently. In the residential sector, it’s a question of scale. If you have larger assets and larger portfolios, you can be more cost-efficient, especially if you have good partnerships within the chain—with developers on the one hand and property managers on the other. Also, the lower energy costs are, the better—that goes hand-in-hand with affordability as well. You can, for example, add solar panels and LED [light-emitting diode] lights to buildings to lower the energy usage in common areas, but one big challenge is how to influence the behavior of tenants, because the energy use of the building is highly dependent on them.
Bearelle: We lease apartments, and we have a service model of providing heat and electricity. It’s not always very easy to do this, because there’s a legal obligation to allow people to make their own decisions about their energy supply. But having lower energy costs is a big advantage for families who are leasing. So we work on lowering the full cost of living: we provide “co-living light,” where residents can share washing machines, cars, open space, and community space. As a property manager, you can make use of economies of scale, and automation can make things easier, but that’s marginal. If you really want to make the difference today, it’s the energy costs and the mobility costs that can make the difference.
What amenities are adding the most value in urban areas?
Bearelle: People want more space, bigger apartments, maybe an extra room where they can work. In the urban cores, what’s selling very well are apartments that have a small extra room and a real terrace rather than a balcony. Outdoor space adds value as well, with greenery and biodiversity, playgrounds for the kids, and urban farming opportunities or other spaces where people can meet.
Olafson: In our properties, we’re making significant investments in coworking spaces, as opposed to the old-style forgotten business center stuck in the corner of the clubhouse with an old printer that doesn’t work. These are dedicated coworking spaces that are inspiring. They have coffee machines and look nice, like a mini WeWork. In one of our properties, we have about 3,000 square feet [278 sq m] dedicated to a coworking space, and it’s packed every single day. The trend toward remote working isn’t going to stop. We have also seen a push toward proper fitness centers—not just a room with three dumbbells and a treadmill, but something that replicates a privately run gym. Everyone wants to be healthy, across all income levels.
Nijmeijer: Shared meeting areas, where you can have dinner together, where you can cowork, where you can meet—those are all becoming more and more important, especially if apartment sizes continue to shrink. And amenities providing for a healthy lifestyle, like bicycle storage or electric vehicle charging locations, should be the standard and not an extra anymore.
Adler: You can’t do without superfast internet when you rent a home or apartment. Also, incorporating secure package delivery has become a necessity, because with the rise of e-commerce, more stuff is getting delivered. Now, energy conservation, wellness, fitness, rooftop decks, and work spaces within units are becoming more common. In cities like Nashville and Los Angeles, there are even communities equipped with production facilities, because residents are creating content either for work or for entertainment. We are also seeing more coworking facilities in apartments, but more as an amenity than as a ground-floor retail business.
What other innovations or trends are you noticing?
Bearelle: Another innovation is the hybrid ownership model. Now, either you own your house or you lease your house. But with blockchain technologies, there are new systems of fractional ownership where people can buy a piece of a multifamily development or a full neighborhood and lease the rest. This is an innovation that can help people in their search for affordability by having access to fractional ownership. They can become full owners in a matter of years. It’s a rent-to-buy scheme based on blockchain technology.
Olafson: In Asia, the developers who are building for-sale products—which is the vast majority of developers—are not yet jumping on the sustainability bandwagon in the residential space. They are doing more in the commercial and retail parts of their portfolio, as they are running them long term. Typically, they are installing the cheapest possible mechanical and electrical systems, the cheapest windows, and they are generally not as focused on what the carbon footprint is, because they’re not paying the electricity bill, the condo buyer is. That said, a few of the bigger Singapore developers, like CDL Group and CapitaLand Group, are starting to put focus on energy efficiency for residential properties. At HOMA, our portfolio of rental apartment properties in Thailand, we have incorporated sustainability since the beginning, because we see longer-term operational efficiencies. For our rental properties, it might cost more upfront, but you’re going to save more net operating income in the long run if you have efficient mechanical and electrical systems, and so on.
Nijmeijer: I’m looking forward to the perfect app that connects tenants, that works well, and that can be rolled out at scale, allowing you to communicate with tenants in different buildings or in a neighborhood. This would help us in engaging with tenants and, for example, influencing their energy use and feeling of safety and inclusiveness. Another innovation is energy service companies that supply renewable energy on a neighborhood level, or self-supplying neighborhoods. Parties working in real estate need to embrace innovations around energy usage and carbon footprint quickly, as this is our responsibility and time is running out.
RON NYREN is a freelance architecture, urban planning, and real estate writer based in the San Francisco Bay area.
