Large scale, high end apartment and condo developments have been taking over headlines and placing a shadow over the “little guys” in rental housing. A report by Enterprise Community Partners and Bedrosian Center on Governance at the University of Southern California (USC) was created and published with the intention to place the spotlight on this overlooked market segment.

Comprehending the Small and Medium Multifamily (SMMF) housing stock emphasizes the daunting size of this market segment and the importance it represents as a source of organic affordable rental housing. According to the report, SMMF multifamily properties with 2 to 49 units represent more than half of all rental housing in the U.S. Alot of these properties were constructed in the 1960s, 1970s and 1980s. These aging assets, combined with limited facilities (in many cases) feed into lower average rental rates versus those acquired by their larger, newer competitors.

A main goal of the report was to prompt policy makers to assist in the creation of financial tools that retain existing property assets as they age and decrease the production barriers around new SMFF properties. Several properties are aging and falling out of the market because of redevelopment, creating a worry that these buildings are not being replaced by similar types. More than a quarter of all units constructed in the 1970s and 1980s were accounted for by SMMF, however, since 1990 it has stood for only 15 percent of new construction based on the report.  

 

Property Developers Face Large Obstacles

The report clearly presents the current challenges involved in developing new small and medium-sized rental properties in a lot of metro areas. Real demand exists for this type of middle market housing, so these challenges hindering developers tapping into the space is certainly problematic.

Currently, it hasn’t made a lot of business sense for the development community to construct small and even medium-sized apartment communities in many cities. Producing large, high-end and luxury apartment projects is proving the best competitive return on investment.  

Considering increasing construction costs and land values, a lot of property developers aspire to maximize density and scale to make the figures work. On average, a 50 unit project needs roughly the same amount of development work to complete as a 150 unit project, however, the margins involved for the developer piloting the 50 unit project are lower and the cap rates are also generally lower, according to Curt Gunsbury, owner of the Solhem Companies.

Solhem, a property management and development company in Minneapolis completed their smallest apartment project which is a 48 unit “Cozē Flats” in 2014. The project succeeded financially mainly due to the fact the site was sloped in a way that enabled the construction for a very inexpensive underground garage and foundation system, along with superior views which contributed to justifying high rents.

One project Solhem is currently assessing is a 60 unit project in Minneapolis that more than likely won’t succeed financially because of a requirement to include retail units in the first floor, making it a mixed use building space and significantly lowering the gross rents of the project. Many small projects struggle to pay their way in an environment that commands such a high level of developer sophistication, capital, and risk.

 

Altering the Regulatory Environment

A strong argument put forward by the report is that SMMF properties play a significant role in offering a more affordable housing option. Multifamily properties with more than 50 units demand the highest average rents at almost $1,000 per month. Properties encompassing 40 – 49 units, reported average rents at just under $950 compared to rentals with two units that averaged rent of $750, according to the report. The sector further accounts for 56 percent of all government funded units, according to the report.   

The size of a property definitely is not the sole dictator for affordability as other factors like location and land prices influence too, while some smaller apartment units do charge high rental rates. The general consensus amongst advocates of more affordable and workforce housing is that they are optimistic if some of the obstacles to producing more small and medium sized properties were removed, this would spur the development of more smaller properties that would serve a wider variety of price points.

One major impediment to the SMMF market development is the regulatory environment surrounding it. Acquiring relevant city approvals and entitlements can be time consuming and complex, along with many cities now having new energy codes, parking fees and higher standards related to exterior aesthetics, all of which incur time and extra costs to a project, thus affect renting rates.

One part of the solution in creating a more supportive environment for small and medium properties is policy reviews. Financial aid and additional development incentives can also be provided by the public sector for the types of projects it wishes to support. The report effectively puts the point forward that being creative at a local level with funding and policy initiatives and then transcending them up to state and federal level is a strong opportunity.

 

Tampa, Florida

One success story is from Omar Garcia who announced plans to transform a vacant downtown Tampa building into 120 micro apartments of about 300 square feet. As the report above found, interest in micro housing isn’t difficult to find, the challenges lie in local regulations and the availability of financing. The availability of these resources is struggling to catch up with a market that developed sooner in some cities (Seattle, Nashville) than in Tampa.

In Garcia’s situation in Tampa, one city policy that emerged was how the city required 120 parking spaces for 120 micro apartments. Further inquiries demonstrated that if he didn’t provide one parking space per unit, he would be obliged to pay a city fee of $26,000 per unit – or roughly $3 million.

Garcia plans to commence construction of the $15 million project, named 220 Madison in the next few weeks. The development will be primarily aimed at students with a price point strategy of $769 per bedroom. The most popular desired feature was for fast internet connection, so the project will supply download speeds of 300 megabits per second – showcasing how real estate is evolving based on tech needs. Furthermore, the development will have beneficial amenities such as a bicycle rack, with room for 60 bikes and potentially several streetside dedicated parking spaces for Zipcars.

A key assumption fueling the micro housing trend is that inhabitants will go carless or switch to shared, self-driving cars. Of Garcia’s 90 pre-booked reservations, 72 percent said they had a car, while 78 percent of those confirmed they were willing to give up their car. Automotive manufacturers recognize that the future is not so much about people owning vehicles, but more for people using vehicles.

An additional factor is an inclination among older homeowners, in particular, to cut down their living expenses and the level of work involved with maintaining a home and how much stuff they have.  A tidal wave in the form of seniors shifting living patterns is anticipated. America will soon see 10,000 Baby Boomers a day turn 65 along with many people living longer.

In Pinellas, LocalShops1 who advocate for small and locally owned businesses, have scheduled a St.Pete Tiny Home Festival for April 7 and 8 at the St. Petersburg College Allstate Center in St.Petersburg.  One current topic of discussion within Tampa is whether they would consider removing the required parking for downtown residential projects. The city has already waived parking requirements for restaurants in a bid to entice more business downtown and this has worked successfully. However, to remove all parking requirements could potentially create high demand for something like a new parking garage – an investment that wouldn’t pay for itself for at least 30 – 50 years.

To understand this challenge further, the nonprofit Tampa Downtown Partnership plans to implement a 6-month parking study early this year. The aim will be to analyze what the urban core’s true inventory of parking is and examine whether downtown requires a new public garage or new rules for parking and development.

In the meantime Tampa City Hall has set requirements relating to a minimum width for sidewalks, to try and create more pedestrian friendly downtown streets. Plans also include the development of several smaller downtown parks to provide the area’s inhabitants with increased living space near their homes, due to an anticipated 3,000 apartments and condominiums enter the market over the next two years.

In this early stage of the micro property market, it appears financiers are potentially not as prepared to bundle and securitize the incoming revenue streams from micro projects as they are for more traditional projects.

 

Leveraging Reonomy to find off market multifamily properties

Using commercial real estate tools like Reonomy with over 47 million commercial properties nationwide would assist in examining locations of interest and identifying off market hidden gems. With a wide variety of search filters such as search by location, search by asset class, search by year built and features like the custom draw tool, Reonomy allows you to tailor make your search to suit your needs.

Below is an example of a search for all multifamily units in Tampa, Florida. As shown in the top right corner, the search generates 4,615 results.

 

The scope of the data on Reonomy allows for the Multifamily section to be further broken down into subcategories such as duplex, multifamily (general), apartment buildings. In the image below we have opted for multifamily (general) to break down the search and make it more specific. This now turns up 556 results to work with that can also be further manipulated if necessary.

 

 

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