The pandemic changed virtually every aspect of life for Americans, including how we shop, the ways our children learn, where we do our work, and — in many cases — our living conditions. The multifamily real estate investment market has also changed substantially since this time one year ago, but some ownership tenets remain, such as the opportunities in value-add properties, the importance of finding the right location, and a focus on supplying tenants what they want in terms of amenities and living space.
“Now is still a great time to buy a multifamily property,” said Nicholas Zolotas, a Realtor at Herrick Lutts Realty Partners in Beverly, Massachusetts. “Each deal has to be taken on a case-by-case basis, but with interest rates being so low and rental demand climbing, even with rising prices you can still achieve a good return.”
As always, he said, purchasing value-add properties where you can renovate to enhance returns is one key path to profitability. But the increased focus on value-add deals is just one of several trends that experts discussed with LoopNet.
Value-Add Properties Provide the Most Opportunities
Unlike the retail sector, which continues to struggle, multifamily commercial properties remain a solid investment, experts said.
“Multifamily [value-add] is the only [sector] I feel confident about right now,” said Cyrus Vaghar of Coldwell-Banker Real Estate in Newton, Massachusetts. “Many developers looking to do mixed-use projects have simply axed the retail on the first floor and are now simply making their buildout a [solely residential] development.”
Most agree that the greatest profit potential exists in value-add buildings, particularly in secondary markets.
“We’ve netted fantastic returns for our investors with our strategy of buying value-add properties in burgeoning secondary markets,” said Lexi Rich, marketing director for Lloyd Jones, LLC, a multifamily and senior living investment and management firm in Miami. “We certainly don’t see this sector of multifamily investment going away any time soon.”
Even in areas where rents have plummeted or stagnated, investors who can spruce up a building with well-chosen renovations, such as an updated kitchen with new appliances and finishes or outdoor living space, can draw in tenants quickly and turn a profit.
“Each deal and each market is different,” Rich said. “Generally, we target an ROI of 20% or higher when deciding which value-add initiatives to implement, and then charge a rent premium accordingly once those upgrades are complete.”
She added, “Sometimes, the market calls for a major upgrade package that includes new flooring and quartz countertops, but in other situations, more nuanced upgrades like new cabinet hardware or adding a tile backsplash can make a big difference to refresh a unit and bring in new renters.”
Experts also noted that forward-thinking investors should overhaul properties with the potential for future condo conversions in mind. If you’re investing in Class-B value-add properties, consider upgrades that would permit a profitable sale in the future, said Michelle Mumoli, a broker for Jersey City, New Jersey-based Triplemint, a firm specializing in multifamily and residential new development properties across the state.
She suggested upgrades that can make the units self-sustaining and practical for future condo sales, giving residents greater privacy and more autonomy over their living space.
“Investors should consider gut renovations that may include creating better floor plans, and providing in-unit washer/dryers and tankless water heaters,” she said.
Buildings with Six to 10 Units Represent Great Opportunities
Several sources suggested that larger buildings (more than four units) may carry greater profits, especially if President Biden introduces tax legislation that rewards environmentally friendly multifamily dwellings. In addition, Biden’s proposed housing regulation changes include reducing or eliminating exclusionary zoning policies, which could put more multi-dwelling units (MDUs) in suburban and rural areas.
“For bigger developers and groups, we’re recommending [buildings with] six- to 10-family units,” said Mumoli. “We’re heading to what once were rural areas with proximity to transportation and, with developers, creating services for future residents. There are great opportunities happening right now.”
Vaghar cited one developer who applied for permitting to expand the footprint of a property by connecting two side-by-side multifamily dwellings and adding 10 new units. “Before the pandemic and with high rents, the financial incentives to do so would not have been there,” Vaghar said.
“As you get above four units, you enter in the commercial loan market where rates are still sub-4% in a lot of places.,” Zolotas noted. “You also have some banks getting creative and giving 35-year amortization, which allows a property to cash-flow well, even with the climbing property prices.”
Renters Seek Dedicated Spaces for Indoor and Outdoor Living
Before putting money into upgrades, look at renovations with an eye on post-pandemic living. Consider what elements of everyday life will change once COVID-19 vaccinations achieve widespread distribution and we operate in a “new normal,” along with the type of amenities tenants want now.
In December 2020, 41.8% of the U.S. workforce continued to work remotely, according to a recent study from online work marketplace Upwork. The same study found that 22% of the American workforce will be full-time remote in 2025, representing an 87% increase from pre-pandemic numbers.
“Tenants need to be able to live and work in their homes, with a dedicated space for their work and schooling, as well as outdoor space that is private,” said Mumoli.
For instance, a study from the National Association of Home Builders found that 80% of homebuyers listed a backyard patio as “essential” in a new home. Renters today want similar amenities, especially as people may put off buying their first home in favor of renting until the economic uncertainty of the pandemic levels out.
Dedicated home office space is also a selling point, but desk nooks in the living room, kitchen or dining area can also provide the flexibility today’s mobile workforce needs. Hard-wired ethernet lines can help ensure solid internet connections for video conferencing or distance learning.
Tenants Prioritize Privacy and Personalization More Than Ever
Pre-pandemic, millennial renters sought out community spaces where they could create bonds with their neighbors. Now, people have started seeking out privacy and have formed their own pods built not by proximity, but by shared ideals for safety and risk tolerance surrounding the virus. In other words, people are choosing to spend time with people they trust and who are being as cautious as they are about COVID-19.
With this in mind, today’s tenants seek private entrances with outdoor access to and from their apartment and in-unit amenities such as laundry service and high-speed WiFi.
“Prior to the pandemic, residents prioritized first-class amenities, fitness centers, and resort-style pools,” Rich said. “After doing research into residents’ new desires, we’ve pivoted to prioritizing the interiors of our apartments. Residents want more space … and a more spacious kitchen as they’re cooking more meals at home.”
She further emphasized that amenities should focus on convenience for the way we live today. For instance, a package locker room for deliveries would best serve the needs of tenants now and post-pandemic, as digital shopping and grocery deliveries have become a new part of life.
“It would be wise for companies to invest in a refrigerated package locker section for residents who receive meal delivery kits or groceries through Instacart or Amazon Fresh,” Rich added.
The Urban Exodus Will Continue, But Big Cities Won’t Die
Most investors we spoke with agreed that an urban exodus is still in full force. “The longer the pandemic continues, the less confidence I have in people wanting to move back to the city in the short-to-medium term,” said Vaghar, who operates primarily within Boston and the surrounding suburbs.
Mumoli agreed that most residents who left major cities and now work remotely won’t return to commuting, but believes the country’s biggest cities will always thrive on a new influx of residents. “A new surge of people will move in, where previously it was unaffordable for them. Life in cities will be different, but it will come back,” she said.
As renters leave top-tier coastal cities like New York, Boston, and areas of Northern and Southern California, they are flocking to the regions such as the Sunbelt, experts say.
“Especially as more companies from the Northeast U.S. and California announce plans to move their headquarters to these Southern states, we’re focused on multifamily properties in suburban markets in the Sunbelt,” Rich explained. “Florida and Texas are attractive due to their agreeable climates, tax benefits for businesses, and generally lower cost of living compared to New York and California.” She noted that Houston, along with the Florida cities of Jacksonville, Orlando, and Daytona Beach, will also “be getting a lot of play this year.”
As multifamily investors prepare for a new era of post-pandemic rentals, lifestyle changes introduced as a result of COVID-19 will continue to affect building amenities, floor plans, and even what renters consider prime locations for quite some time.