Multifamily Market Update: Dealers discuss the state of the market, challenges and important trends – June 2023
By Darius Helm
The multifamily market has posted steady, and often stunning, growth just about every year since the Great Recession, and it continues to look fairly healthy-last year, according to experts at FEI Group’s multifamily division, the market grew in new construction, renovations and apartment turns. According to the group, “Multifamily has always been a foundational business that tends to be resilient in good times and bad.”
FEI Group also notes that increased demand from investors and tenants-along with new laws that promote multifamily housing, boosted by a steady rise in population coupled with high interest rates and increased new home construction costs-is driving many people into the multifamily market or keeping them there for an extended period of time.
Multifamily units as recently as a decade ago were typically carpet and sheet vinyl, but in recent years, they have trended strongly toward an LVT-dominated format with carpet in the bedrooms, particularly in the lower end and middle of the market, changing many aspects of the business.
Floor Focus reached out to four business leaders who work in the multifamily market, some with a regional focus and others with a more national reach-Redi Carpet’s Brian Caress, Priority Floors’ Kimberly Rooney, Matt Routzon from Guy’s Floor Service, and ProFloors’ Rob Walker-to ask about how the business has changed in recent years, the current state of the market, trends in flooring use, challenges facing the business and more.
Q: What are the biggest challenges facing the multifamily business today?
CARESS: I see two impending challenges. First, our non-product costs-like rents, healthcare, real estate-and people costs continue to rise, resulting in a serious need to maintain gross profit dollars. We have just come off a year of the largest and highest number of price increases in recent memory. Some of our suppliers have excess capacity and are reducing prices on certain products. While this may initially be perceived as positive, it is a threat to our profitability if it causes our gross profit dollars to go backwards. Second, our customers have been on a “free money” building and buying spree and have developed and acquired many projects at extremely low interest and cap rates. With the recent rise in interest rates, those projects that have short duration or construction loans that will reset may find themselves upside down and in a negative cashflow position. This creates a major credit risk for vendors like us.
ROUTZON: The supply chain has caused many issues from start to finish in our new multifamily business, not necessarily the supply of flooring but rather, all of the other products from windows to cabinets and interior trim. Our schedules have been pushed back anywhere from weeks to months, and getting material on a just-in-time basis has become virtually impossible. The scheduling and budgeting of our labor needs has become very difficult in today’s market.
WALKER: We still see opportunities out there, but unit turns are slower as products (LVT) are lasting longer. With so much hard surface, subfloor repairs and understanding the cost of prep and repairs can be a challenge.
ROONEY: I’m not sure if this is the “biggest challenge,” but a growing challenge in multifamily flooring is the number of LVP SKUs needed to stock. Ten years ago, we could stock three to five colors of LVP, and that serviced the entire market. Today, we have to stock over a dozen. Rationalizing SKU count helps lower overhead and increase buying power with suppliers.
Q: Where is multifamily’s growth in terms of entry level, the middle of the market and high end?
CARESS: The overwhelming majority of new developments are at the top end of the spectrum, with developers focusing on Class A properties, even though over 50% of renter households earn less than $50,000 per year. Over the past five years, there have been approximately 1.5 million units delivered, with over 90% being Class A properties. In 2000, approximately 40% of all new multifamily development was Class B, but that number has been reduced to under 10% over the last decade. With record rent inflation, it continues to become more difficult for the working class to keep up. Workforce housing (targeting households earning 60% to 120% of the median income) has been steadily shrinking and is down by 14% of total supply over the last 20 years.
ROUTZON: In our market, we are seeing growth at all levels. There is a housing shortage in Colorado, and people are being pushed into multifamily rentals as an alternative. The number of new multifamily projects that are both under construction as well as in the planning stages is tremendous. Talking with multiple general contractors and developers, there is no anticipation of it slowing in the near future. Although there is more demand for affordable multifamily, with “affordable” being a relative term, the upward pressure on rents continues to be strong.
ROONEY: The southern Louisiana and southern Mississippi markets have remained entry-level and lower-price-point material markets. They also tend to be attracted to more traditional looks.
WALKER: Entry-level and middle assets are our biggest growth opportunity.
Q: Are there big regional differences in terms of multifamily growth? How about urban versus suburban?
WALKER: Urban units are generally smaller (700 square feet) and turn less due to LVT being the main product of choice. Suburban units are generally larger (garden style) units and turn more often due to using more carpet.
CARESS: Multifamily development tends to follow job growth and population migration, which has been exacerbated by Covid and remote work. Developers will develop where people are moving, and with the exodus from California and major population centers in the Northeast, that has created a need for more housing from Las Vegas through Texas into Florida and up into the Carolinas. On a more localized level, institutional investors remain focused on high-profile urban core product, where higher rents help offset increased construction costs.
ROUTZON: In our market, there are many substantial projects in both the urban and suburban areas. There does not tend to be much differentiation in the types of flooring products being used between the different regions.
Q: What are typical floorcoverings in multifamily, and how has that changed in recent years?
CARESS: LVT has been transformative in the industry. Twenty years ago, our product mix was 80% carpet and 15% sheet vinyl, with the final 5% consisting of some vinyl tile, ceramic or wood. Today, the mix is about equal between carpet and LVT, with some small amounts of the other products. A large portion of urban core projects are almost exclusively hard surface, with carpet only in the bedrooms, if at all. The use of LVT has continued to grow in traditional garden-style apartments, as well, with many using it in the common areas and carpet only in the bedrooms.
ROONEY: The carpet footprint began to shrink about ten years ago, and this trend continues. However, we have seen carpet hold its footprint in upper-level units due to the issue of noise transfer to the lower-level units.
ROUTZON: LVP has taken over the market here. It is not uncommon for an apartment to have wall-to-wall LVP. We used to have carpet everywhere, with sheet vinyl in the kitchens and bathrooms. Now, developers are focusing more on the product lifecycle and the durability of LVP. Sheet vinyl has virtually disappeared as a product used in multifamily, and the only carpet that we really see anymore is restricted to bedrooms. There is also a considerable amount of competition among multifamily projects, and as a result, we are seeing a significant increase in the amount of tile being installed in tub and showers and on bathroom floors.
WALKER: New construction is 6 mil LVT and 25 ounce carpet. Turns are more carpet (25 ounce) and LVT in various gauges. Ten years ago, there was more carpet than hard surface.
Q: What product types perform best and worst in multifamily?
CARESS: LVT definitely outperforms carpet, although its increased lifecycle comes at a substantially higher cost.
WALKER: LVT is going to last longer, but a 6 mil product isn’t going to last as long as a 12 mil or a 20 mil. Heavier-gauge vinyl is a lower-cost option. Performance is predicated on the tenant and their upkeep.
ROUTZON: We use a substantial amount of 12 mil gluedown LVP, and it has performed very well over the years. We are starting to see a little bit of a shift to a click-together product with a sound attenuation attached [backing]. In the few projects we have completed with these products, we have seen the benefits of increased sound attenuation and a big decrease in the amount of floor prep needed. I think that, with developers starting to look at the bigger cost picture, this trend may continue and potentially become a cost savings and a performance enhancement.
ROONEY: Solution-dyed nylon is the best-performing carpet; however, the price point may not warrant the upgrade to the apartment owner/manager. And 2mm, 6 to 8 mil vinyl plank performs great for the price in apartments.
Q: Are there any notable trends in terms of the types of carpet being installed?
WALKER: The trend is heathered, tonal and fleck in the turn business.
CARESS: Like the shift in hard surface to LVT, there has been a major shift in carpet as well. Over the last 15 years, the multifamily industry has gone from the majority of carpet being nylon, to it now being PET and much of it is solution dyed. Currently, there seems to be a design trend in moving to tonal colors, as well.
ROUTZON: We used to be a nylon-only market. However, with the advancements being made in polyester products, developers do not seem to have much of a preference anymore. As a result, we are now installing quite a bit of polyester.
Q: How has the shift toward hard surface flooring (and its longer lifecycle) impacted the profitability of multifamily business?
ROONEY: The shift from carpet to hard surface started over ten years ago. Although hard surface offers a longer lifecycle, we haven’t seen a tremendous decrease in profitability or sales as a result. Higher-end properties want to maintain a fashion-forward competitive edge, so the replacement cycle is shorter than the product lifecycle.
CARESS: LVT’s lifecycle is substantially longer than carpet, but the higher costs of the product, along with the associated trim and installation costs, offset the longer time between installs.
ROUTZON: We have been able to stay pretty steady with our profitability in this segment. The shift to LVP has allowed us to be more efficient and decrease our need for multiple crews for multiple product offerings.
WALKER: LVT is certainly more profitable than carpet, but units will turn less overall. As LVT SKUs drop and LVT gets torn up, the cost to replace it is a positive for the flooring dealer.
Q: How do single-family rentals (SFRs) differ from typical multifamily?
CARESS: The products are similar, and we can typically use the same installers. The main difference between SFR and multifamily turns is that each unit requires measuring, and there are some different billing processes. While there have been smaller local and regional players for years, there are now about a dozen national players with institutional money that have been consolidating the segment. I expect the space will continue to grow, and that there will be further consolidation.
WALKER: Fewer homes on the market due to interest rate hikes means fewer homes to purchase.
ROONEY: This is still a small portion of our business. The same products are used in single-family rentals as in multifamily rentals.
Q: What are the most important trends in multifamily new construction and in apartment turns?
ROONEY: New construction continues to expand the hard surface footprint in the apartment.
WALKER: LVT is the driver these days, and we are seeing less carpet as some properties go to LVT throughout. This will equal a slower turn rate.
CARESS: Amenities and technology are what residents, especially the younger generation, are looking for. From a product perspective, they want to see the same things they would if they were buying or renting a home-or scrolling through Instagram or Pinterest, for that matter.
ROUTZON: Amenity spaces continue to be more important. The features and finishes have become a differentiator from one property to the next and have also enabled developers to increase rents. From a flooring perspective, we have been able to sell significantly upgraded products and be a part of some very challenging and intricate designs.
Q: To what extent does access to seasoned installers impact your business? Has the situation improved? How so? Has the trend toward easy-install products eased this situation?
ROONEY: Access to seasoned installers is invaluable and would make our lives easier. Skilled construction labor is generally difficult to come by. Multifamily flooring installation is the least complex flooring installation versus residential and commercial installations; hence, the pay rates are lower. As a result, there’s less financial incentive for labor to remain in the multifamily space or start in the multifamily space.
CARESS: Installers are the backbone of our business, and recruiting new people to the trade continues to be a challenge. Overall, we have a shortage of installers just like we do of plumbers and electricians. Most kids growing up today aren’t interested in working with their hands, even though these types of jobs don’t require a college education and offer income opportunities above the median. Over the last couple of years, we had to continuously increase labor rates to keep our installers from going to work for the builder dealers. With that segment being soft right now, it has taken some of the pressure off the installer shortage. And with the increase in the marketshare of LVT, our revenue per installer has increased.
ROUTZON: Finding seasoned installers has always been an issue. I would say that the situation has improved recently. However, the cost of labor has increased significantly over the past two years, and passing those increases along has been challenging. I do think that we have been able to counteract some of those increases with efficiency.
WALKER: Labor overall for the industry is a challenge. However, we don’t see as much of an impact related to the seasoned installer in terms of unit-turn work. It’s more so on the new construction side. On a move-forward basis, the industry needs to pull together for training the next generation.
Q: What should we expect in terms of multifamily market performance over the next couple of years?
CARESS: There is still a lot of new product in the pipeline, but with the recent rise in interest rates and elevated construction costs, new permits and starts have come down drastically. That said, absorption, the number of units brought online and absorbed into the supply, averages roughly 300,000 units annually. Last year, there were approximately 400,000 units delivered, but only 50,000 or so were absorbed. This year, we are expecting delivery of well over 500,000 units. This means continued excess supply, and that will translate to lower average occupancy rates and higher lease concessions over the next 12 to 18 months.
While we are facing some short-term headwinds, the long-term outlook for multifamily is bright. We still have a housing shortage, and while supply exceeds demand right now, the reduction in new starts will balance out 18 to 24 months from now, at which time I would expect rents and occupancy will begin to tick back up.
WALKER: We believe Atlanta and the South will continue to grow, and, along with that, so will the need for rental housing in both apartments and SFR. We see nothing but opportunities.
ROONEY: Southern Louisiana and Mississippi have experienced a lot of replacement due to hurricanes, so there are a lot of new floors in the market that won’t need to be replaced for a while.
ROUTZON: We anticipate the market to stay very strong over the next two to three years. The housing shortage in our market has definitely increased the demand for multifamily at the low, medium and high end. Barring any outside factors that may come along, we don’t anticipate much of a slowdown. I am, however, very curious to see the impact of interest rates and the Uyghur Forced Labor Prevention Act.
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