This article is sponsored by Invesco Real Estate
Covid-19 hit global economies hard, and certain industries harder than others. Real estate is not immune, but the impact varies significantly across property sectors and within sectors. The multifamily sector plays an important role in global real estate, and the extent of that role varies across regions of the globe.
According to data from MSCI regarding sector share representation in global core real estate, the highest percentage weighting of multifamily investment is in the US (26.8 percent) and in Europe (18.2 percent).
Multifamily, like other real estate markets, is a sector whose performance oscillates relative to other sectors over time, so the impact of covid-19 over the last 12 months makes now a particularly good time to understand the current factors affecting the multifamily cycle.
The global pandemic has caused more people to work from home (WFH), which in turn has caused tenants to look at their living arrangements through the lens of their work environment. Beyond the near-term challenges presented by covid-19, the demand outlook for multifamily remains positive, particularly in areas with stronger job growth, places where homeownership is more expensive than renting, and in innovation centers.
As new apartments are built, we expect there to be an increase in the number of larger units and the creation of apartment layouts with dedicated work alcoves or “dens” to accommodate an increase in time spent WFH. In the near term, there may be some switching of demand from the urban core to lower-density suburbs, but there appears still to be ample demand for urban multifamily.
Government support and the need for multifamily
In the US, the CARES Act allowed for forbearance for homeowners struggling to make mortgage payments. There are currently 2.3 million Americans receiving these benefits. What happens when the benefits run out? Homeownership could fall. A 1 percent decline in the US homeownership rate is the equivalent of about one million households potentially moving into the rental market, which would increase demand for US multifamily.
In the EU, homeownership levels vary widely across countries. Countries with lower homeownership rates are typically comprised of larger rental markets, thus presenting an opportunity to create modern, institutional grade stock in those markets. Support for employees through furlough schemes has been seen in some European counties such as the UK, Germany, Italy, Sweden and Ireland. This is, again, time limited and so may have impacts as this support unwinds.
Tenant demand for multifamily in the US has evolved during covid-19. Although there has been a decrease in corporate short-term rentals, typically 4-6 percent of the urban demand, the subsequent vacancies are being absorbed by other tenants. Demand is now trending back up.
In particular, there is increased demand in suburban markets. As some tenants can work remotely and do not need proximity to the office at present, they are seeking more space for less cost. It remains to be seen if this demand for lower-density product will persist after covid-19. While there was some resistance to longer-term leases earlier this year with a shift to shorter leases and lower rents, lease terms appear to be trending back to normal levels.
In Europe, where there are fewer corporate tenants, there has been no material shift away from specific unit types, although during periods of lockdown we have seen reduced demand for studio and smaller sized apartments. Overall demand for multifamily has been slightly less impacted in Europe than in the US due to both the affordability to become an owner occupier and the tight supply of rental properties in many markets. Leasing rates continue to be strong.
Tenant experience and demand
There was a sudden sharp shift to WFH, increasing from an average of 0.5 days a week to five days a week during the covid-19 lockdown phase. While most people are expected to return to the office once the pandemic has passed, many people are expected to continue to WFH at least part of the week as the home front and workplace converge more closely together.
A 2020 Global Work-from-Home Experience Survey by Iometrics and Global Workplace Analytics found significant differences in working location preferences and WFH productivity between generations. Millennials and generation Z prefer less time WFH and find themselves less productive at home than the older generations.
WFH has affected design trends, too. Tenants have better success working from home in units with defined sleeping and working areas, not studios. The need for better defined areas or for more space is in contrast to the development trend in the prior cycle toward smaller unit sizes.
Some buildings had added co-working environments to help tenants adjust to the WFH trend. During covid-19, tenants have either been unable to access these amenities or have chosen to avoid common areas altogether.
In Europe, there are typically fewer amenities offered than in the US multifamily properties. European tenants value access to outside spaces such as balconies and courtyards. They have also moved to an increased use of technology in older stock such as digital keys and fiber optics. Quality Wi-Fi is clearly a necessity while WFH.
Space adaptability becomes more important: unit layouts need to be adaptable to a holistic set of tenants
WFH, affordability, life stage needs all impact location: where-to-live choices might become marginally less tied to office location; importance of other factors might increase; life stage needs may differ between millennials and generation Z; affordability remains a critical consideration
Apartment: job growth, rising home prices and possibly rising mortgage rates should drive increased apartment demand
Single-family rental: SFR benefits from the same drivers as apartments, plus it benefits from life-stage demand from millennials
Senior housing: economic recovery and vaccinations should restore demand, though tech innovations are helping people age in place longer
Manufactured housing: jobs recovery, housing unaffordability and savings needs of the pre-retirement generation should all boost demand
Student housing: expect a post-covid recovery, but declining student-age population and rising online learning should dampen mid-term demand
Thinking about the E, S and G
We are committed to being a good steward of the environment in a manner that is consistent with our responsibilities to our tenants, our investors and our business partners. As we increasingly place value on ESG issues, we have ensured that we make ESG integration a priority in the way we conduct our business and sustain our underlying investments.
During 2020 we undertook a number of initiatives across our residential portfolio where we use the UK as an example. From an environmental perspective, this included the installation of solar panels, smart electricity meters and thermostatic heaters, as well as water saving initiatives within residential units and “on-site” waste recycling. We also continue to work with responsible contractors.
In addition, the landlord now needs to think about covid-safe practices such as ventilation systems in lifts and communal indoor spaces for multi-story, multi-community buildings which are able to extract airborne particles, making this a safe environment for sharing communities. At Invesco Real Estate this is a feature being installed in some of our current multifamily developments in the UK.
From a social perspective, while covid-19 impacted some activities, we worked closely with our property managers to focus on our mission of building and nurturing the diverse communities we have in our properties, as we have a mix of units for families, couples and single occupants. Some of the initiatives we initiated included celebrations during key holidays or dates such as Easter, Halloween, Thanksgiving and Chinese New Year; as well as encouraging households to post their activities on our social media channels, which have included pumpkin carving competitions; coffee grab-and-go initiatives; yoga sessions; wine tastings; and mom and baby mornings. In addition, we are also partnering with local charities in building children’s playgrounds, supporting local food banks and engaging with local businesses.
2025 core market: likely to be in focus
Continuing urbanization in growth cities
Tech connectivity facilitating WFH
Access to outside space
Landlords in a digital future
Rather than introducing new trends, covid-19 accelerated technology-driven transitions that were already driving real estate demand: e-commerce growing shares of retail sales, office employees working increasingly flexibly, and residential tenants seeking homes with improved amenities.
This digital future places a greater onus on landlords to become increasingly involved in the operation of buildings, a pressure that has also been created for many years by urban planners favoring mixed-use developments.
Lockdowns have brought peoples’ residential accommodation into sharp focus. WFH requires quality connectivity. Greater time at home accentuates appropriate spaces to both work and rest and also places a premium on access to outdoor leisure space.
Much of the investment stock is “older generation” and many tenants are now drawn to newer, quality accommodation designed for technology and managed by responsive professionals. The digital future changes the focus for the real estate owner and the days of passively collecting a tenant’s rent are over.
Multifamily as an investment
Relative performance of the multifamily sector has varied globally. European residential investments have outperformed the European MSCI index. In the US, while multifamily has underperformed the NCREIF index over the last few years, this is more due to the relative strong outperformance of the industrial sector than weakness in the multifamily sector itself.
Site selection and location are drivers of relative performance in our view. Important asset attributes include durable incomes, lower operating volatility and rent levels that are discounted to the upper rental tiers.
However, the outlook remains unclear on pricing post-covid. Thus far there is no sign of pricing discounts in Europe, but as time goes by there may be pressure on home and condominium builders to sell their units to multifamily investors if home sales start to slow.
In the US, there has been little transactional evidence of any material price difference for prime properties. Indeed, we anticipate that there may be potential for some yield/cap rate compression due to the expected volume of investor interest.
In Europe, there is greater pressure on local governments to set regulations and create rent control programs. However, newer build properties are typically less regulated than older stock and generally are not subject to strict rent control regulations.
In the US, historically, rent control has not been successful in maintaining affordable housing. Rent control regimes such as in New York or San Francisco tend to constrain investor and developer interest and hence inhibit the housing supply over time. This has the effect of putting upward pressure on rents as a result of supply shortages.