3 Trends to be aware of in Multifamily Development & Acquisition
Knowing these three trends in advance can provide a competitive advantage (plus one hot off the presses bonus trend)
It is inherently more cost-effective to build it right the first time instead of coming back and fixing it later when it comes to investments. When it comes to real estate development, there are three things that you should be considering now, or you’ll be paying (more) to put them in later.
A drive across town provides evidence of the first trend, the increase in Electric Vehicle (EV) Ownership. The dawn of the EV has arrived, and it isn’t going away. In 2017, EV production reached only 966,000 units. At its current trend, by 2027, that is projected to increase to 13.2 million units, a shift from less than 1% of total light vehicles produced to over 13.7 percent of the annual global production. This was further emphasized in the US when GM recently committed to providing over 30 models by 2025 with their “a path towards an all-electric future” strategy.
This is important to multi-family owners as according to the US Census Bureau, renter-occupied units make up 30.4% of all US Households as of the 4th quarter of 2020. Since over 85% of EV charging takes place at home, this provides an infrastructure issue for those properties trying to attract renters when they cannot provide them with the resources needed to recharge their vehicles. In fact, a white paper by RCLCO Real Estate Advisors lays out the case that properties without EV charging infrastructure will struggle to remain considered a Class A property.
Now, you might say, well, they can charge their cars at work or at a fast charger somewhere. While true, that is an option; it isn’t a preferred option for the EV owner. The pandemic provides but one example of why relying on work charging isn’t a great idea. Sitting for 30 to 60 minutes at a random fast charger is a time suck for most EV drivers. When it comes time to select a community to call home, this increase will be part of the decision-making process.
It is important to understand EV drivers' behaviors towards charging. They tend to be more aligned with how most of us treat our phones. We like starting our day with a full phone charge, so the last thing many of us do before we go to bed is plug it in. EV owners tend to do the same with their vehicles. While the range has improved, EV drivers tend to pay more attention to their vehicle's charge level than conventional internal combustion engine (ICE) vehicle owners pay attention to their gas tank. Just as many phone owners will “top off” their charge as they see the battery capacity dwindling through the day, EV owners will “top off” when the opportunity exists, but when it comes to getting a full charge, just like with our phones, that normally occurs at home.
With a projected 125 million EV drivers expected to be operating by 2030, and knowing a large percentage of those drivers live in rental housing, and they like to charge at home, multifamily owners who aren’t prepared with appropriate infrastructure will be at a disadvantage.
The second trend for developers to consider is the impact of remote working and the need for communities to develop amenities that help their tenants more easily work from home. A wide variety of businesses have already announced an intent to allow staff to permanently work from home, including Microsoft, Facebook, Square, and Spotify. Non-tech companies that have made public comments that hint towards an increased remote workforce also include Deutsche Bank and Morgan Stanley. From a recruitment standpoint, it provides an opportunity to increase the applicant pool. From a payroll standpoint, salaries for employees outside of major metropolitan areas may provide an opportunity to reduce payroll costs. From a real estate standpoint, the company's footprint can be adjusted down, reducing both cost and impact.
Multifamily developers taking this into account need to consider the impact on both space and infrastructure. From a technology standpoint, community-wide wifi allows residents the ability to work from anywhere on the property. Such an amenity also provides building systems to ride on that network's backbone, providing building operators greater access to data. However, as traffic increases on community-wide networks, the bandwidth must be sufficient to handle the load without users experiencing connection issues. Just as we provide tenants with Walk Scores, it may soon be an advantage to provide a Wired Score as well.
In addition to connectivity, when designing units, providing working space in the apartment design may also provide a competitive advantage. Many of you may be familiar with the WeWork concept, similarly, some developers are introducing shared working space amenities into residential rental community designs as well. Developers have noticed that the increase of remote working may also bring the need for occasional coworking spaces. Perhaps a conference room or other dedicated work area.
A third trend is the extension of pre-acquisition due diligence to consider environmental performance and resilience. While we have traditionally looked at environmental impacts, such as contaminants like asbestos and fuel tanks, this evaluation previously stopped with hazardous materials. Savy asset managers are now looking beyond hazardous materials and considering what environmental impacts, social risks, and operational inefficiencies are present.
As noted in this article, the evaluation of acquisition risks should also include identifying resiliency issues. Does the property contain risks that need to be mitigated as part of the acquisition process? What are the insurance implications?
While I referred to acquisitions, many of the same compliance issues can also be applied to new developments. Some examples include:
A review of environmental and social regulations, including construction codes
A review of the construction companies track record on environmental and social issues, such as safety and non-compliance with national regulations or negative publicity
A review of the construction companies performance against internationally accepted best practices
A review of any actions taken to mitigate potential environmental or social issues associated with the property
A review of the building systems and performance and identification of efficiency opportunities
As the analysis of risks and opportunities increases, the demand for transparency of this assessment from investors will likely increase as well. This requires organizations to standardize their process for assessing transitional risk, physical risk, and social risk and ensure that this process is documented and followed routinely, aka governance.
Awareness of these trends can help prepare your portfolio for the future. The best time to plan is now before an asset is built or acquired. Smart decisions made today can reduce impact, expenses, and inconvenience later.
Bonus Trend: Climate Disclosure Reporting
If you haven’t checked it out yet, DWS published its first DWS Climate Report 2020. A significant event for asset management organizations as this report establishes a separate report focused on TCFD (Task Force on Climate-related Financial Disclosures). This report provides one of the first specific reports dedicated to informing investors about the financial risks and opportunities around the management of physical assets and the strategy to mitigate those risks and take advantage of the opportunities.
Before this report, many organizations combined their resilience efforts within an overall sustainability report or perhaps within their organizational annual report. While good, the potential impact of climate change on the investments was not singled out to this degree in those reporting strategies.
Providing a great example of leadership in this area through this report, DWS is able to provide their stakeholder’s details around the governance, strategy, risk management, and metrics and targets associated with potential climate-related impacts. By making the document publicly available, DWS provides both transparency as well as industry leadership. This is a trend that you are likely to see other asset management companies incorporate. This one is hot off the presses; nice job, DWS!
You can help reduce the impact of the built environment by sharing this blog with your peers. Together we can impact the 39% of greenhouse gasses attributed to the built environment. It starts with awareness, and we succeed with teamwork.
Stay well!
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Chris Laughman is the ThirtyNine Blog author, a blog dedicated to reducing the impact of the built environment. When not blogging, Chris is helping the real estate industry reduce energy and water impact as the Vice President of Sustainability for Conservice, the Utility Experts. Whether Multifamily, Single Family, Student Housing, Commercial, or Military, we simplify utility billing and expense management by doing it for you. Our insight into your utility consumption provides an opportunity to identify risks. Leveraging innovation and experience, we ignite solutions with real impacts and track performance to ensure the trendline stays laser-focused on the goal. At Conservice, we have developed a true bill-to-boardroom solution to help truly make a difference. We have before us a tremendous opportunity. Standing shoulder to shoulder, we will get this done. Contact me at claughman@conservice.com for more information.
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