There are numerous initiatives focused on creating more affordable apartment units. Most of these initiatives are targeting the Millennials—those renters that are between the ages of 18 and 34 and single. These initiatives include “micro” units, which are sized generally below 400 sq. ft., and “adult dormitories,” a communal housing configuration akin to college dormitory experience. We are highly underserved by affordable housing units in the U.S., particularly in the larger coastal cities of New York, Boston, Washington DC, Los Angeles and San Francisco, so all initiatives to add more affordable housing supply should be applauded.
But is the greatest need for affordable rentals really in the single, Millennial segment? As an owner and operator of affordable and workforce apartment communities across the U.S., our experience suggests that the greatest demand for affordable rental housing is with families, typically headed by someone above the age of 45.
My company, Avanath Capital Management, LLC, owns and operates in excess of 7,000 LIHTC, Section 8 and naturally affordable units. Our residents make $25,000 to $70,000 per year. We own apartment communities in urban locations such as Oakland, Calif., Long Beach, Calif., Brooklyn, N.Y., Washington DC, Orlando, Fla., Seattle, and Dallas. In 23 of our 30 properties, we have three-bedroom units. We have six properties that have four-bedroom units. Our specific experience with three and four-bedroom units indicates the following five trends:
- Our three- and four-bedroom apartments are in the highest demand and have the lowest turnover. We have several properties that are at full occupancy, with waiting lists. There is a high percentage of people on our waiting lists that want larger apartments.
- While the demand for larger units is primarily from families, the term “family” can have a variety of configurations: A husband and wife with children, a single parent with children, an unmarried couple with children, a multigenerational family, etc. It is reality imitating art, as in the Modern Family television show.
- Larger units are desired by older couples that are “moving down” from home ownership—motivated mainly by financial reasons, although there are lifestyle considerations as well, particularly the elimination of home maintenance. The extra bedroom or two can accommodate visits by children and grandchildren.
- Communities with larger units that attract families demand different amenities than properties with small units that target seniors. While the micro unit buildings have expresso machines and yoga rooms, the residents in our family communities are partial to outdoor grilling areas, dog washing stations, pet parks and children play areas.
- The location-location-location rule still applies to apartment communities targeting families. Close proximity to employment and transportation is as important for family rentals as it is in rental properties targeting single Millennials. Another important consideration for family rental properties is proximity to quality schools. While there is considerable demand in downtown/urban city centers, certain suburban locations with superior schools are highly attractive to families that rent. For instance, we have two outlying apartment communities—in Ann Arbor, Mich. and Cary, N.C.—that have high demand because of their superior public school districts.
Our portfolio experience demonstrating the strong demand for larger, family rentals is supported by key market statistics provided by the National Multifamily Housing Council (NMHC):
- 9.6 million households or 22 percent of total rental households are headed by a person age 30 or younger. 19 million households or 44 percent of the total rental households are headed by a person age 45 or older.
- 48 percent of rental households are comprised of unmarried singles. The balance, or 52 percent of the households, are comprised of married couples, couples with children, domestic partners, blended families, generational families or other quasi-family configurations.
- The total stock of multifamily rental housing in the U.S. is comprised of 18.4 million units. There are only 1.6 million units that are three-bedroom or larger—or only 8.7 percent of the total multifamily apartment inventory.
There is clearly an imbalance in the supply of larger apartments for families versus the demand for larger apartment units. This imbalance is fueling rising rents and maintaining unprecedented high occupancies of larger units. Also, the demand for larger rental units is fueling the strong demand for single-family rentals.
Investors and developers are responding to the demand of single, Millennial renters by building micro units and adult dorms. So how does a shrewd investor capitalize on the demand for affordable family rentals? Here are some of the strategies that we are pursuing:
- Many of the properties built in the 1960s and 1970s have larger floor plans, but are “out of favor” with core institutional investors. We are acquiring some of these class-C vintage properties and upgrading them to be affordable class-B properties.
- In many dense urban neighborhoods, the older properties with large apartment units are found in smaller buildings, very often with only 10 to 50 apartment units. We have been assembling some of these buildings and renovating them to accommodate larger families. We are pursuing this strategy in several communities and have successfully executed this strategy in Brooklyn and Pasadena, Calif.
- We are currently evaluating the potential development of new workforce housing in Orlando, utilizing a modular system that will reduce construction costs and development timeframes. These new developments will certainly include two- and three-bedroom units.
In conclusion, today’s “modern families” need affordable housing more than ever before. As family formation continues to evolve and include new combinations of blended and multi-generational members, the need for larger rental units will climb to new heights.
Investors and developers who take note of this demand and work to meet it will reap benefits by way of investment yields and social impact. Affordable micro-units and dormitories are one small solution to the affordable housing crisis, but there is a larger solution that still needs to be addressed.
Daryl Carter is founder, chairman and CEO of Avanath Capital Management, a privately held, vertically integrated investment firm with a focus on workforce and affordable housing investments throughout the U.S. Carter is also immediate past chairman of the National Multifamily Housing Council. He can be reached at [email protected].