Julie Whelan:
I welcome Jen Siebrits, our Head of Research for the U.K., And Matt Vance, our Head of Multifamily Research for the U.S. Welcome Jen and Matt.
Matt Vance:
Hi Julie.
Julie Whelan:
Hello. So multifamily has been a resilient asset class since the pandemic. On one hand, inflation and wage growth suggests that could continue. But as Richard mentioned, consumer confidence is low, which might suggest something else. So what's your perspective?
Matt Vance:
Well, Julie apartment rents are generally determined around occupancy and housing demand in the U.S. Remains exceptionally high. It has brought occupancy rates to historic levels. And so it's not surprising that we're seeing exceptional rent growth as well. I would say the good news is that the average renter in a professionally managed apartment property is not yet cost burdened. That average tenant pays right around 27% of their income toward rent and that's pretty good. It's below that 30% typical threshold considered to be cost burdened. So there is room for additional rent growth and as you point out especially with additional wage growth. I should probably acknowledge quickly that for lower-income households they're, especially in high-cost cities, they face much more significant affordability issues.
Matt Vance:
But it is great that we're seeing more and more emphasis from the FHA, Fannie and Freddie and investment funds and strategies being established to tackle this problem and have more focused investment into workforce housing. And we need more of it. But as I said, there is still room for growth. Now on the other hand, vacancy rates did begin to increase last quarter and it was really the result of both supply and demand. Developers have responded to these incredibly strong fundamentals. They've added a lot of new supply to the pipeline and at the same time we saw unseasonably weak demand. And some of that slow down in demand is the delayed effect of what we saw last year, which was a truly record year for housing demand in the U.S.
Matt Vance:
And it's very likely having pulled forward some of the demand that we would've normally seen this year and maybe even next year. But also I have to believe that some of that slowdown in demand is being driven by exactly what you mentioned in your question. And that is that falling consumer confidence. It's causing households to make more conservative financial decisions. And housing is just one of those. So if I were gonna sum this up for you in a sentence, it's that the U.S. Multifamily sector will continue performing above trend for a while longer, but that vacancy rates will continue their drift back up toward more normal levels this year and next, and that we can expect rent growth to decelerate as a result.
Julie Whelan:
Okay. Thanks for that, Matt. So Jen, we hear global investors are targeting Europe now for multifamily properties. What is behind that trend? And do you think it's gonna be lasting?
Jen Siebrits:
Yeah. So Julie, look, compared to North America, multifamily housing as an investment-grade asset class is a relatively new concept. I mean, living in private rental homes isn't a new concept in Europe, but instead of being provided by the state or individual landlords, more is being provided by large-scale private and institution investors. And of course, many of these investors cut their teeth in the U.S. And are bringing their expertise to Europe. In many places there's a first mover advantage to be had with the ability to gain significant market share, particularly in the higher-end space, which is still achieving premium rent. It's not just that the size of the rent market is growing. This is being driven by longer-run social and demographic factors, which are delaying entry into home ownership, right? Things like getting married later and having children later and more younger children among younger people in higher education who have got large student debt accumulated, and also factored in is high and rising house prices. This has led to affordability barriers to home ownership. And this demand has led to robust rental growth and low vacancies. In the U.K. We currently have the highest levels of occupancy since we started collecting the data.
Julie Whelan:
Very interesting, Jen, so this last question for this section goes to both of you and we know the world is a connected place and Jessica and Ada talked about the rise of hybrid. So how does the rise of hybrid and in turn more remote or home-working, what does that mean for downtown and conversely suburban multifamily market health?
Matt Vance:
Well, I would say in the U.S. early in the pandemic we saw much bigger, much more negative impacts in downtowns and expensive coastal cities, but that's all over now. The suburbs went largely unaffected, but now renters have stormed back into their urban, their live-work-play downtown apartments. But I would say that there is, I think, something worth commenting on here that's playing out in both urban and suburban settings, and that is developers in the U.S. Have recognized the need that their residents have for more space to accommodate remote working. And Jen, I see you nodding, I think this is playing out everywhere really, but for some context in the U.S., the average apartment, and by the way, these developers are approaching this in two major ways. Number one, they are increasing the average size of the apartments being developed. Since the pandemic, the average size of newly built apartments has increased, or is 9.6% larger than the units built in the 10 years leading up to it. That's 90 square feet for incorporating workspaces. The other way that they're approaching this is by incorporating workspaces directly into the shared common areas of these properties and really giving their tenants the ability to leave their apartment and feel almost like they're going to work, even if it's just down the hall or up or down a few floors.
Jen Siebrits:
Yeah. I mean, similar to you in the U.S., Matt, I mean, large cities like London were really hard hit by remote working practice, but we found housing demand has returned really swiftly. I mean, interestingly, we've seen a pick up in demand for centrally located small apartments, pied a terre, where families have left London, rural locations, and now need somewhere to stay for the few days a week that they work in the office. I also agree with you, Matt, about the demand for workspaces, you know, within apartments or within the overall scheme, this has become an essential requirement. And of course, another issue that's high up on the agenda is sustainability. Developers in Europe are starting to consider how upcoming regulations might have an impact on the overall design of their schemes.
Julie Whelan:
All right, Jen and Matt. Well, thank you so much. Maybe hybrid work is a reason for me to get a pied a terre. I think that's a great excuse that I can give my husband. So the world is a connected place. And the changes that we're seeing in consumer behavior are really impacting all asset classes is what we're learning. And that is probably among the most evident in multifamily.
