Multi-Family Markets and Trends: Shifting into a higher gear - Aug/Sep 2015

By Calista Sprague

Since 2010, the multi-family market has been growing at a brisk pace, benefiting in part from the lagging recovery of the single-family market. Rents are on the rise, vacancies are at historic lows, and demand for multi-family housing continues to outpace construction. “I don’t know that there’s been a better time to be in the rental business than right now,” says Jim Mitchell, director of maintenance and purchasing at Dominium Properties. “It’s very robust.” 

According to Dodge Data and Analytics, the value of construction starts for multi-family housing expanded by 28% in 2014 to more than $65 billion. For five consecutive years the sector has posted annual dollar gains higher than 20%, and growth is expected to continue at least through 2017. The volume of renters in the market is expanding as well. A recent study by the Urban Institute predicts that there will be four million more new renters than new homeowners over the next 15 years, increasing demand for rental housing. 

The predictions have certainly held true thus far. Double-digit growth was recorded in the multi-family market for all regions of the U.S. in 2014, led by the Northeast at 41% and South Atlantic states at 30%, while the West trailed at 17%, the only region below 20%. And as of June, year-to-date increases nationwide were reported at a healthy 29%. 

One of the issues created by this sustained construction is the pressure that it puts on the supply of construction materials and qualified construction labor, including qualified flooring installers. “That’s a pressure point for all of us in these segments in the coming years,” says Graham Howerton, vice president at FloorExpo, the leading residential and multi-family flooring contractor group. With so many projects in the pipeline, developments take longer to bring to completion because materials and labor are in such high demand. 

The only ominous cloud in the multi-family sky is the Architecture Billings Index, which is seen as a leading indicator normally preceding construction spending by nine to 12 months, where numbers have fallen for multi-family projects for each of the first six months in 2015 to the lowest point since 2011, according to AIA. However, unit starts, permits and contract dollars are all in positive territory so far this year, showing no signs of weakness, so industry leaders remain optimistic for a strong second half of the year. 

DEFINING MULTI-FAMILY
The multi-family market usually consists of developments with at least five units that may include apartment complexes, privatized military housing on or off base, student housing on or off campus, and senior living communities. Many condominium complexes turned from for-sale to rental properties during the Great Recession, and may be considered part of the multi-family market as well. 

Although these housing segments cater to vastly different demographics, property managers and flooring contractors provide similar services and products to each. In addition to overseeing the purchase and maintenance for flooring in each unit, property managers are also responsible for common areas in multi-family communities, such as lobbies, corridors, clubhouses and administrative offices. 

Units range from affordable and government subsidized communities up through luxury apartments. The multi-family market is expanding at all price levels, but currently the upper end of the market is showing the most activity. One reason for this is that a large number of families in the rental market have made the decision to upgrade the rental experience rather than buy, and they have higher expectations for a unit’s finishes and amenities.

THE MILLENNIAL EFFECT
The 20- to 34-year-old demographic is growing to historic numbers. According to the U.S. Census Bureau, the 43.5 million young adults in this cohort represented 13.6% of the population in 2014, up from 34.5 million the year before, and the age group will continue to grow over the next five years to an estimated peak of 44.9 million. 

In light of these statistics, the single-family market should be flush with first-time homebuyers. However, the trend away from homeownership is increasing. First timers made up only 33% of home sales in 2014 compared to a historic average of 40%, and a recent Gallup poll found that 41% of non-homeowners have no plans to buy this year, up from 31% two years ago. 

Many Millennials are either uninterested or unable to enter the housing market. Young adults today are less likely to be working full time than their counterparts before the recession, and those who are working full time may be earning smaller paychecks. At the same time, student loan debt has reached historic heights, jumping 84% since the recession to $1.2 trillion nationwide, according to CNN Money. Combine these factors with more stringent lending practices, and many Millennials simply cannot afford to buy a starter home. 

However, some young adults who can afford to buy a home still opt to rent instead. Some have chosen to put off starting families and prefer the mobility of renting, which allows them to pursue career changes easily. Many enjoy urban life with all the amenities that a city has to offer just steps away from their front doors, locations where real estate is out of reach for most first-time buyers. And some Millennials are reticent to invest in the volatile housing market after watching their parents lose equity or lose their homes during the recession.

Without these first-time buyers in the market, existing homeowners have fewer opportunities to move up, so the single-family market suffers overall, while the multi-family market reaps the benefits from a burgeoning rental demographic. 

In addition, many of the Millennials’ parents who lost homes to foreclosure have been forced back into the rental market as well. Meanwhile the Baby Boomers are aging, and soon large number of them will matriculate into senior living communities, further bolstering the multi-family market in the coming years. 

FLOORING CHOICES AND TRENDS
Multi-family complex owners and property managers look first to performance and lifecycle as the main criteria for flooring purchases, whether for units or public space. Apartments, dorms, military housing and senior living centers can be abusive environments that put flooring through its paces, so the more durable and long lasting a flooring installation, the better the profit margin long term. Product price follows closely as a significant consideration, especially at more affordable developments. 

Design trails in importance, although styling takes on greater weight at university dormitories and senior living facilities, helping to attract potential residents. Sustainability is also taken into consideration, although it is rarely a deal breaker. A green story is most important at universities where ecologically minded students are often involved in flooring choices, but it is still not one of the top considerations.

Demand for additional housing units is high, especially in the apartment and senior living sectors, so the number of new developments is growing rapidly. For existing communities, this means competing with newly constructed buildings filled with the latest looks and trending finishes. Both Howerton and Mitchell think that this phenomenon is leading to a faster turnover in flooring. In order to remain competitive, existing properties are getting facelifts more often. Floors are being replaced not necessarily due to wear, but because potential residents will opt for properties with more up-to-date finishes.

Trends in multi-family tend to be subtle. Properties must appeal to a wide variety of residents, so colors remain more neutral and designs more understated, especially within the units. The most striking trend in recent years has been the move from carpet to hard surface flooring in living spaces, especially for new construction. This trend began in single-family housing and is now making its way into apartments and dorm rooms as well. While there is some use of laminate, as well as engineered hardwood at the higher end of the market, LVT is currently the most popular choice. 

This hard surface trend has been driven primarily by those renters who could afford to buy homes but opt to rent instead. They prefer better finishes akin to those found in single-family residences. But the trend has become pervasive throughout the multi-family market, found in dormitories and senior living facilities as well. Universities install LVT in living spaces at dormitories for a higher end look to help attract new students, and senior living managers install LVT to give its residents more of a feeling of home as opposed to an institutional look.

Existing properties are less likely to switch to hard surfaces, especially in affordable housing developments, because the change requires cutting door casings and adding shoe molding, which adds significantly to the cost and time for renovation. 

Carpet is still preferred for bedrooms for all property types. Cut pile in solid neutral colors or subtle friezes are most popular, but textured LCLs may be installed at higher end developments. 

Kitchen and bath floors as well as entryways tend to be covered with ceramic, LVT or sheet vinyl, depending on the property type. These hard surfaces predominantly appear in wood looks, although stone looks are more popular in some markets. Textured, weathered woods in grey tones have become increasingly popular, especially for upper end units, while affordable housing developments utilize more traditional wood looks.

Designers often inject higher style into public areas, choosing flooring with more variety of color and design for lobbies, clubhouses and corridors.

SOFT SURFACE FLOORING
Although hard surface has been steadily replacing carpet in the living areas of multi-family units, carpet still maintains a large footprint in the market. Within the units, carpet is most often found in the bedrooms, but in public areas, carpet may be found pretty much anywhere, including corridors, club houses, community centers and administrative offices. Mitchell estimates that carpet accounts for approximately 80% of the flooring in the public spaces of Dominium’s affordable living complexes. 

Some multi-family communities automatically replace carpet with each tenant change, while others expect a single installation to last through one or two tenant changes. Those looking for longevity often invest in quality solution-dyed nylon products with a 25-ounce face weight in the hopes of getting a three- to five-year lifecycle. 

According to Howerton, for the upper end apartments, where many would-be homebuyers are renting, communities install—and renters expect—quality flooring. Carpet for the bedrooms is usually high on style and performance in either a textured solution-dyed nylon or, if it’s a Mohawk product, triexta. 

In more affordable communities, a fresh look is still important, but finishes tend to be less sophisticated. Carpet is often PET and is turned regularly. Interestingly, Howerton has noticed that the popularity of PET is beginning to bleed into some of the higher end properties as well. He says that 25-ounce solution-dyed or piece-dyed polyester may be placed in higher end apartments, because it looks as good as nylon when it is first installed. The polyester comes in at a significantly lower price, although it won’t last as long. 

Crushing and matting are touted as the main problems with polyester carpet, followed by soiling and staining. PET carpet is expected to last for one to three years depending on traffic and maintenance, whereas nylon products usually last for a minimum of three years. Despite its short lifecycle, the use of polyester is expanding. “PET is growing tremendously in our segment as a first option, as well as in new home construction,” Howerton points out. “But it has not surpassed nylon. Nylon is still king.” 

At Dominium, Mitchell says that he had to fight a myth, both within the company and industry wide, that property managers and others in the field replace flooring more often than necessary because it makes the unit easier to rent. Mitchell keeps careful records and has collected data that proves the carpet on average, throughout Dominium’s 22,000 units, lasts seven years. 

“Like at a lot of other management outfits,” Mitchell adds, “our people’s compensation is tied directly to financial performance of their properties, so that would suggest it’s not to their advantage to spend more money and change carpets out. In fact, our data proves that they don’t.”

Even though Dominium oversees affordable housing, Mitchell invests in nylon and triexta rather than polyester carpet in order to maximize the product’s lifecycle. “We tested PET in a few properties and cannot get it to last more than two years,” he says. “It crushes.” 

He typically opts for a 25-ounce face weight for HUD properties, to comply with requirements, as well as for properties with an abundance of young children or with higher occupancy rates. At developments with less foot traffic, perhaps with a preponderance of seniors for example, a lower face weight might be installed.

Commercial carpet tile is another growing category in multi-family, used mainly for public spaces and corridors. In addition to high performance attributes, the tiles dampen noise, reduce installation waste and allow for selective replacement if a tile gets damaged or soiled.

HARD SURFACE FLOORING
Since carpet has been relegated to bedrooms, Howerton says that flooring decisions increasingly revolve around hard surface products, primarily LVT. Property managers carefully consider the type of plank, the wearlayer and design. 

At the highest end of the market, developments may install ceramic tile in both the kitchens and baths along with engineered wood in the main living areas to create looks that fetch top dollar. But most common for new construction, and often for renovation as well, is the use of wood look LVT throughout the main living areas, kitchens and baths. 

Sheet vinyl is more often used in more affordable housing, and the wood look has become increasingly popular. Mitchell regularly specifies vinyl sheet and uses some LVT when necessary to compete with other developments. 

Throughout the multi-family market, owners and managers are banking on an extended lifecycle for LVT to offset the higher upfront cost. Howerton says that the hope is for a doubled lifecycle, but the trend is too new yet to be well tested. So far, Mitchell reports a 13- to 14-year average lifecycle for vinyl products, both sheet and LVT, which nearly doubles Dominium’s seven-year average for carpet. Of course, he uses more sheet vinyl, since the portfolio consists of mainly affordable housing. 

Although the use of LVT in the multi-family market is steadily growing for both units and public space, Howerton is not yet convinced it will continue. “We’ll see if it’s a short-term trend or if it’s going to stick around for a long time,” he says. “In my mind that’s still very much to be determined. It hasn’t been in the marketplace long enough to see.”

SUSTAINABILITY
Sustainability in the multi-family market is largely consumer driven, and just like consumers in the rest of the residential market, property managers respond favorably to sustainability stories, but they are not willing to pay extra for them. 

“While we haven’t seen many customers make any big moves in the area of green products or sustainability, there certainly are a few leaders in the segment who take it very seriously, and we have some interesting programs with them,” Howerton explains. “But for the most part that decision is way down the line of importance.”

Manufacturers, however, invest a lot of time and money in sustainability programs. “All have interesting, valid stories, and we tell those,” says Howerton. “But it’s going to be some time before it makes an impact on our segment.” With the growing emphasis on transparency and health related labeling, more multi-family developments may begin to tout healthier environments. “Maybe we’re on the leading edge and that’s going to become more important,” Howerton adds.

Related Topics:U.S. Census Bureau, The American Institute of Architects, Mohawk Industries