Trends in the Apartment Sector: How To Take Advantage of Shifting DemographicsWILLIAM J. FERGUSON

Chief Executive Officer, Ferguson Partners

TRAVIS KONONEN

Managing Director, Ferguson Partners

TRENDS IN THE APARTMENT SECTOR: HOW TO TAKE ADVANTAGE OF SHIFTING DEMOGRAPHICS

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Multifamily property owners and lenders

are benefiting from the shift to mixed-use

spaces as more projects integrate housing,

retail and recreation spaces to attract people

looking to live close to amenities, transit and

city centers.

Many analysts predict a downturn for

apartment real estate investment trusts (REITs)

as rent increases slow and more multifamily

units come onto the market. It is unclear if the

demand for apartments by millennials and

aging boomers will be enough to offset some

of the slowing growth trends in the industry.

While many millennials are renting longer

as they delay home purchases or decide

to spend their money elsewhere, there are

signs of oversupply in the multifamily market,

particularly in expensive urban areas.

Multifamily developers, REITs and other

owners need to analyze these changing

consumer demands and make sure they have

the right leadership in place to best position

themselves to take advantage of these

new trends.

Changing demographics

Multifamily development experienced an

early rebound after the financial crisis, which

helped spur new construction, according to

a PwC report.1 Much of this development is

already online, particularly in major urban

1 https://www.pwc.com/us/en/asset-management/real-es-tate/emerging-trends-in-real-estate.html

centers. This is slowing a little with multifamily

construction permits dropping about 13% in

2016 from 2015, with housing starts falling 3%.

Completions were up 2% to 315,000 units in

2016, according to Freddie Mac data.2

Millennials entering the job market are

prime candidates for rental apartments,

particularly as they deal with student debt

and tightened mortgage lending standards

from banks, making purchasing a home

more challenging. After seeing many homes

lose value, millennials are more interested

in having a flexible lifestyle than investing

in real estate, driving increased demand for

multifamily units.3

People under age 30 make up 51% of the

rental market, and many are choosing to

delay home purchases. Homeownership for

people under age 35 fell to 35% in 2015 from

a high of 43% in 2004.4

Many are delaying starting families and

purchasing homes, driving demand for

apartments in city centers or close to

entertainment, dining and recreation

experiences. In order to compete, developers

and investors are looking to implement

amenities such as new technology,

2 http://www.freddiemac.com/multifamily/pdf/mf_2017_outlook.pdf

3 https://www.pwc.com/us/en/asset-management/real-es-tate/emerging-trends-in-real-estate.html

4 https://www.key.com/kco/images/millennials-chang-ing-multifamily-market.pdf

FERGUSON PARTNERS | 3

community activities, recreation options and

other experiences.5

Also squeezing younger renters is the

increased demand from baby boomers,

with many looking to move closer to urban

amenities now that their children have moved

out. Much of this demand is for higher-end

luxury spaces within walking distance of

restaurants, shopping, entertainment and

other city amenities.

The number of households of people age 55

and older is expected to reach 50 million by

2035, indicating the demand for multifamily

is likely to continue to be strong. As housing

prices remain robust, that gives older

homeowners the opportunity to sell single-

family homes and move to new communities.6

Multifamily developers who add design

elements and programs that appeal to older

adults can help units stand out. For example,

musician Jimmy Buffett is partnering with a

Florida developer to build a themed lifestyle

community in Daytona Beach for those older

than 55, including spa, fitness center and

food options.7 New Jersey’s BNE Real Estate

Group is building a low-rise development on

the water with 160 one- and two-bedroom

units, offering the feel of single-family

5 https://www.bdcnetwork.com/multifamily-millennials-un-derstanding-what-gen-yers-want-apartment-design

6 http://www.multifamilyexecutive.com/design-develop-ment/the-new-baby-boomer-boom_o

7 http://www.multifamilyexecutive.com/design-develop-ment/the-new-baby-boomer-boom_o

homes instead of dense urban living. The

development features a refurbished historic

home for community activities and amenities

such as yoga, pool, greenways and other

recreation options.8

Developers must also be sure to not overlook

technology. According to a 2014 survey,

58% of boomers want technology that helps

with home maintenance, 64% are looking

for technology that helps connect them

socially and 76% are looking for home health

monitoring services.9

Current market trends

Despite increasing demand from both

millennials and baby boomers, some investors

are concerned there is an oversupply of

multifamily units since construction has been

aggressive. In areas such as San Francisco,

New York and Seattle, many investors are

seeing rents drop and decreases in operating

income, according to PwC.10

There is also a coming ceiling on rent growth.

How much is too much to actually charge?

This is a challenge, particularly for REITs

that count on steady rent increases in order

to continue quarterly dividends. As growth

slows, developers and owners will need

8 http://www.multifamilyexecutive.com/design-develop-ment/single-family-feel-in-a-55-plus-multifamily-property_o

9 http://www.multifamilyexecutive.com/design-develop-ment/the-new-baby-boomer-boom_o

10 https://www.pwc.com/us/en/asset-management/re-al-estate/emerging-trends-in-real-estate.html

TRENDS IN THE APARTMENT SECTOR: HOW TO TAKE ADVANTAGE OF SHIFTING DEMOGRAPHICS

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to stay ahead of trends, specifically target

renters, and offer more to compete and keep

buildings occupied.

To combat some of the slowing growth in

large urban centers, many are considering

projects outside of major cities along mass

transit hubs. For example, many young

professionals and empty nesters are leaving

the high rents of Manhattan and Brooklyn for

mixed-use multifamily developments along

the Long Island Rail Road or Metro-North

corridor.11 The same is true in Dallas where

82% of the new multifamily units built from

Jan. 2012 to Sept. 2015 were in areas outside

of the urban core.12

There are also smaller cities showing

strength in multifamily. There is an influx of

new residents in places such as Nashville,

Atlanta, Charlotte and Austin. Areas like these

have recovered quickly from the economic

downturn, are attractive to millennials for

their entertainment and recreation options,

and have thriving job markets. They are also

interesting to investors since there are ample

opportunities for local and national investors,

according to PwC.

11 https://www.nytimes.com/2016/12/16/realestate/the-new-suburbia-more-urban.html

12 https://www.forbes.com/sites/axiometrics/2016/01/14/urban-core-vs-suburbs-apartment-locations-may-sur-prise/#358f3d66c141

Conclusion

To compete and attract tenants, multifamily

owners and managers must be creative in

offering amenities that appeal to a variety

of residents from millennials to boomers.

Combining shopping, entertainment,

recreation and other communal spaces with

access to transportation or proximity to city

amenities can help ensure developments are

attractive to many types of people.

For Boards and executives, that means

expanding their talent pools to include

individuals with backgrounds and experiences

in a variety of industries and sectors.

Adding those with retail, entertainment and

recreation expertise to their ranks of asset

management professionals will help make

sure they are positioned to capitalize on

shifting demographics and demand.

Boards would also do well to add younger

executives as well as those with experience

in nontraditional sectors such as technology,

retail and entertainment. Diversifying the

types of people represented in upper

management as well as the pipeline of

talent being groomed for promotion will help

apartment owners, developers and managers

capitalize on current trends and prepare for

the future.

FERGUSON PARTNERS | 5

Travis Kononen is a Managing Director at Ferguson Partners.

He specializes in the REIT, real estate private equity and

investment banking sectors, executing mandates in the US, UK,

and continental Europe. Mr. Kononen furthermore maintains

close links with INSEAD and the London Business Schools’ real

estate programs. Prior to opening the San Francisco office, he

spent six years in the firm’s London office, and three years in the

New York office.

Mr. Kononen has a degree from Oregon State University.Travis Kononen

Manging Director

Ferguson Partners

+1 415-874-3160

tkononen@fergusonpartners.com

WILLIAM J. FERGUSON

Chief Executive Officer

Ferguson Partners

+1 312-893-2339

wferguson@fergusonpartners.com

Mr. Ferguson serves as Chairman and Chief Executive Officer

of Ferguson Partners and as the Co-Chairman and Co-

Chief Executive Officer of FPL Advisory Group. Mr. Ferguson

conducts senior management recruiting assignments, with a

specialization in president/chief executive officer searches

and recruiting assignments for Boards of Trustees/Directors.

He also facilitates public company Board assessments and

senior management assessments.

Before founding Ferguson Partners, Mr. Ferguson was a

Managing Director with one of the leading international

executive recruiting consultants. There, he co-managed the

firm’s national real estate practice. Prior to focusing on real

estate, Mr. Ferguson worked for General Mills, Inc. in Minneapolis

in strategic marketing.

Mr. Ferguson holds a Bachelor’s degree from Harvard University,

where he was a member of Phi Beta Kappa, and an MBA in

marketing from the Wharton Graduate School of Business.

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