Innovate Or Die: How Multifamily Is Becoming A Radically Different Beast

Innovation is often seen as the differentiation between life or death for any product, company or industry, but that hasn’t stopped commercial real estate and its largest, most conservative sector—multifamily—from remaining relatively unchanged for decades. But the panelists of Bisnow’s Residence of the Future event—which will be held at New World Stages on July 20—believe we’re at the cusp of a new era of multifamily and homes.

Whether it’s co-living or a higher tier of amenities, residential properties are quickly becoming a market for radically different, big-return investments.

“We’re in inning No. 1 of a five- to 10-year disruption of the residential space,” Ollie co-founder and CEO Chris Bledsoe (pictured) tells Bisnow. Disruption in other real estate sectors has been accelerating, with co-working changing office spaces and micro-hotels, high-end hostels and Airbnb radically changing hospitality. But while Chris says it makes sense that multifamily has lagged behind other asset classes, "we’re definitely in the nascent stages of a huge transformation.”

This, he says, is due to the realization that residential space has become a commoditized, consumer product that has to, as Chris puts it, “innovate or die.” 

“We’ve been delivering the same obsolete product to the market for decades,” he says, “because it’s been easy to finance. But, as soon as these spaces open, tenants want to reconfigure the product with temporary walls and other renovations. The temporary wall industry is a symptom that the product is in dire need of innovation.”

Slate Property Group principal Martin Nussbaum (pictured) agrees, saying that every asset class, and even every building, needs to find ways to come across as unique and appealing to certain demographics and preferences. 

But, he notes, outside of initial reluctance seven to nine years ago, he and Slate have never had a problem convincing their investors. With solid data and models clearly illustrating that fresh-out-of-college tenants want spaces specifically tailored to them, Martin says investors are very open to ways that can maximize their revenue streams.

But Common CEO Brad Hargreaves (pictured) believes nothing has really changed in terms of demand. Most spaces were financed to accommodate families, but were often filled with young professionals and their roommates, who are getting married, having children and leaving rentals much later in their lives than the previous generation.

Common and other companies aren’t changing the way people live, he insists, but just fitting the market. And, even when trying to raise funds in the wake of co-living company Campus’ bankruptcy, Brad was able to show an economic model that would produce good returns for investors and landlords.

One of the biggest areas of needed change, Chris says, is the elimination of unnecessary space. Typical tenants spend 90% of their time in 40% of their homes, he says, meaning most are overpaying for oversized, obsolete spaces they don’t really need.

By rightsizing spaces for a tenant's need and budget, landlords can produce a space that truly gets the biggest bang for the buck.

Chris says every square foot of unnecessary space that Ollie eliminates becomes $50/year of incremental rent savings for its tenants, incremental services and amenities for its tenants, or incremental profit for its real estate partners.

Martin points out that cutting space shouldn’t be a problem, as most tenants these days don’t focus much on their bedroom size. For them, he insists, it’s the quality that matters.

“What’s interesting,” Chris says, “is that we’re finding that the smaller units around 178 SF are leasing up the quickest and at the highest price per SF. The market is showing us that we may need to be pushing the envelope more than we already are.”

This extra space can have a variety of new uses. Both Martin and Megalith Capital Management CEO Sam Sidhu (pictured) suggest creating gyms, common rooms or lounges that can help boost a building's competitive edge and even incentivize socialization on each floor.

The specific choice of amenity depends on the type of tenant you’re trying to attract. For example, at River Tower—the 315-unit multifamily rental building Slate acquired for $390M—Slate is catering to empty nesters and families, adding a playroom for kids, a gym, extra storage space, a rentable space for parties and large outdoor space. 

But Brad is more cautious, finding that many luxury buildings have amenity spaces that go unused.

Another big trend to watch is the role of technology. Anbau CIO Arvind Bajaj believes we are just scratching the surface of what is possible with technology, and that its role will only increase as future generations become more tech-savvy. Sam agrees, noting that many of Megalith’s new projects feature Nest (an integrated climate control system), KISI (a keyless access system) and solar energy panels.

And while Martin is reluctant to go above and beyond for tech in rental spaces—“I’d love nothing more than to put Sonos in every apartment we’re renting out, but it’s just not economical,” he notes—Slate is making sure that each apartment is thoughtfully wired with Fios, proper cabling and outlets.

The firm is also trying to standardize a high-tech security system, where tenants can buzz people into their apartments through their cellphones, even if they’re not present.

Still, many admitted that smaller spaces and co-living aren’t the be-all, end-all of the next few years. Both Chris and Brad said that co-living has grown in appeal to many different groups—including students, medical residents, Millennials, childless couples and even downsizing Baby Boomers—it isn’t a one-size-fits-all proposition. 

“People have different preferences,” Brad says. “That’s why we offer a range of room sizes and even the option for different bathrooms. But we still find that this arrangement and layout isn’t much different than what you’d find in a conventional space.”

In addition, Arvind insists that many of the qualities that people look for in co-living—proximity to friends and other personal/professional relationships, easy transit, a good, safe location—can be found at plenty of other, more conventional, spaces, such as 50-58 East Third St (pictured), a multifamily property Anbau recently acquired.

“And to be honest,” Arvind says, “many people want a traditional pre-war, full of character, walk-up experience, as long as the right amenities are in place.”

“There are many demographics that just want that extra space and are willing to pay for it,” Martin adds.

But all agree that the market is shifting. With rental properties being "near impossible" to underwrite and the 421-a expiration, Martin says most firms are focused on modernizing older buildings rather than building new ones.

Arvind has noticed that the Millennial tenant base has become “less financially focused" than it once was. "Finance jobs still matter," he says, "but they aren't the same dominant force they were 20 years ago when I moved to NYC.”

With companies like Common focusing on the $40k to $120k annual income bracket, we may see the dawn of a whole new type of space and price range. And looking off into the future, Brad is curious if aging Millennials will create a new hybrid between conventional and co-living spaces.