What does the future look like for apartments? What trends are we seeing now that point the way? I’ll cover that in this episode.
My name is Kenny Wolfe and I’ve been a real estate syndicator and investor for over eleven years; in this time, I’ve built a successful real estate investment firm, Wolfe Investments. If you’re new to the show, make sure to subscribe so you’re notified when a new episode comes out.
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What does the future look like for apartments? What trends are we seeing now that point the way? I'll cover that in this video.
Welcome to Real Estate Investing with Kenny Wolfe, the show with weekly topics designed to help you learn how to build your ideal life through real estate investing. My name is Kenny Wolfe and I've been a real estate syndicator and investor for almost 12 years now. In this time, I built a successful real estate investment firm, Wolfe Investments. If you're new to the show, make sure to subscribe so you're notified when a new episode comes out.
Between 1991 and 2021, home ownership peaked at 69.2% in 2004. It then started to trend down all the way in 2016 to 63.7%. It rebounded from there a tad, but now it's headed downward again. A new report showed that with each passing year, the share of millennial renters saying they will never own a home is increasing; now that's 22%.
Also, millennial home ownership today is at 48.6%, which is 20% lower than Gen X and about 30% lower than baby boomers at that same time period. Millennials that are on the older spectrum of that group are behind where prior generations were at as well. At the age of 40, 60% of millennials at age 40 own their own home, where Gen X was at 64% and baby boomers at 68% at that same age. We can see that home ownership percentage continues to go down across each subsequent generation by the age of 40. If there are less folks owning their own homes, that means they are either living in single family rentals or apartment communities, and that means it's going up. The draw to be nimble on where you live has been a big, big draw for millennials to rent, as opposed to buy. Single family home costs jumped this past year as well, which will also mean fewer homeowners, as the down payments also went up--which means it costs more to own land, and to buy a house. That leads to either a longer runway to save up for the down payment or more people being left behind on owning their home.
Either way, it all boils down to home ownership seems to be headed downward. Rentals, whether that's single family or multi-family, will continue to be in growing demand. The average national occupancy on multi-family is just under 97% today. The demand is most definitely there for apartments across our portfolio for sure. We're seeing double digit rent renewals, which is being driven by big demand for very little supply. Newly constructed, multi-family properties are going to have to deliver smaller unit sizes due to higher cost of labor materials and land. This latest round of inflation has really pushed up what it costs to produce a newly built apartment building. Instead of it costing $160,000 to $180,000 per unit, it is now costing $180,000 to $220,000 per unit ground up here in Texas. To make the numbers work at the higher cost means that investors need to get higher rents per square foot.
That means higher rents overall, but it will also lead to a trend to deliver lower amounts of square feet per unit. It's like a box of cereal where the price remains the same, but you know they cut 10% of what they used to put in that box. Smaller units will allow developers to fit more residents in the same building, which would allow the investors to continue developing. Now, I don't think micro units are going to be the norm in most of the United States, but I do think instead of a 700 square foot, one bedroom, one bath unit, you're going to start seeing a 650 square foot, one bedroom, one bath unit. I also think you'll see more efficiency apartments as a percentage of the building's unit mix start to creep up slowly. These smaller units will allow more affordable rents for more folks, compared to what they would have been if units remained larger, and having fewer efficiency apartments in the market.
Density requirements are going to have to increase as well to meet the rising demand for apartments. These density requirements are typically set by the local city and where the development is going to be taking place. These cities are incentivized to add more density, as it impacts the amount of property tax they can charge, for the same amount of land being used up within their city, in a positive way. I've actually had multiple city council members locally here in Dallas-Fort Worth reach out to me to discuss how to bring apartment rents within reach of their middle-class constituents. What I brought up with them is one of the easiest ways to provide that, which is to increase the density at a property and to have smaller units. If you can increase the supply of apartments available, then it will ease the demand constraints and then thus it will lead to lower prices of rent, compared to where they would've been without the higher density and the larger units.
These smaller units and more dense properties will continue to have to be built as A class assets, and that's because of the higher cost of construction. This leads to the necessity of getting A class rents. You've got land, labor and material prices at high levels, so you've got to get higher level rents because of the costs. To get those A class rents, you need to have an A class finish out, such as hard counter hub surfaces of either granite or quartz, nice cabinets and appliances, nice flooring, et cetera. The ever-increasing demand for apartments is here to stay, as home prices continue to climb. Younger generations are buying fewer homes, and this is going to lead to smaller units in higher density communities. All these forces will lead to more services being provided at those properties. These will range from fiber to the home, trash pickup, valet, close washing services, bike storage, storage lockers, et cetera.
Because of the units being smaller, you're going to see apartment dwellers want more things to do outside of their home. They also want to have the fastest internet connection possible, directly to their home due to higher amounts of people working from their home. Of course, all these services and amenities will come at a cost, but we are already seeing these increased services and amenities that you would typically find in hotel properties, way back when. Now they're starting to be offered at multi-family assets. We're already seeing delivery package lockers being more of a typical amenity at all our properties, between A class and C class. Dog washing stations and dog parks--yes, both outdoor and indoor dog parks are a thing. Gaming rooms, podcast booths, co-working spaces and small movie theaters, are already creeping into these newly built A class properties. The list of items to do outside of your apartment continues to grow, which seems like a great thing to me.
When you can continue to add value and bring your apartment community together, it's a good thing. Whatever the latest trends are in the future, you'll definitely see more services and amenities offered at newly built apartment communities. Having that increased density will allow developers to bring more of these services to the residents, because the cost is spread amongst more people. The housing market landscape continues to trend toward less home ownership. The higher demand and increased cost to develop new apartment communities will lead to smaller apartment units and increased density at each location. Smaller units and higher density will continue the trend for more services and amenities for those residents.
This has been real estate investing with Kenny Wolfe. Thanks so much for listening.