Why Technology is Key to Delivering Occupier Flexibility | ACCESS THE REPORT→

There Is Value in Vintage Multifamily Across the Sun Belt for Those Willing to Work

One of the many effects of the pandemic is that people are increasingly moving back in with their parents. A recent Pew Research Center study shows that 53 percent of individuals in the U.S. aged 18 to 29 are living at ‘home’ right now—more than any previous generation including the Great Depression. This is creating a shadow demand for affordable, well-located apartments that fit the needs of today’s young professionals. Once the kids finally give Mom and Dad their nests back, they are not likely going to be moving into the luxury high rise in dense urban areas. Instead, they’re probably going to look for a cost-effective, and safe alternative, which means increased demand for vintage multifamily apartments. 

Vintage multifamily complexes are attractive to younger renters because they offer a safe, spacious, and affordable place to live, that is usually a quick Uber ride away from nightlife and cultural amenities. Tech-driven cities across the Sun Belt region of the United States, like Austin, Phoenix, and Raleigh, are seeing population increases because of their phenomenal cost of living and commitment to creating high-paying jobs through investments in manufacturing and technology. 

Whether it is a company like Oracle moving its headquarters to Austin, TX, or young professionals taking advantage of new work-from-home policies, the pandemic has made many reconsider where they live and work. These new migration trends, coupled with the staggering amount of young people who are still living with their parents, are creating unprecedented demand for vintage multifamily apartment complexes, especially in Sun Belt cities.

I believe this shadow demand, coupled with the pandemic causing an exodus out of the urban core, has created tremendous value around vintage multifamily apartments in Sun Belt cities, potentially ultimately leading to the greatest buying opportunity within multifamily real estate over the past 100 years. My company real estate company continues to be active across the Sun Belt region, co-investing in or directly owning and operating over 13.8 million square feet of real estate across projects in 13 states and 38 cities. Since March of last year, we have closed 11 commercial real estate deals in Austin alone. The pandemic was unpredictable however, we recognized that it would only speed up the exodus from big markets such as New York and Los Angeles, something we’ve been seeing for years. 

What is vintage?

Vintage multifamily building combine elements of Class A, B, and C properties. Typically, vintage multifamily buildings are heavily renovated Class C properties located in areas adjacent to Class A properties that attract Class B-level property rents. In simple terms, vintage multifamily apartment complexes are a 30- to 40-year-old product that needs a lot of deferred maintenance but are impeccably located next to the urban core. These complexes are typically two- or three-story walk-ups, which bodes well for the post-pandemic world, and are made up of 120 doors—too small for private equity, but perfect for those willing to create a space worthy of a Class A finish out. 

According to Thomas Edison, Opportunity is missed by most people because it’s dressed in overalls and looks like work. Well, for those willing to gut-renovate, upgrade electrical, mechanical, plumbing, and roofing, and include the smart home elements today’s renter has come to expect, there is opportunity in vintage multifamily. If buying these properties at a discount to replacement costs, effectively, you can offer value to your tenant, charging up to 40 percent less for the exact same finish as the brand-new development just built down the street, around the corner or a few blocks away. 

We believe being adjacent to these luxury, Class A apartments is key, because they typically fall within the $5 Uber ride rule, which may be a part of every multifamily investor’s due diligence. Essentially, if renters can get to all the restaurants, parks, museums, and cultural amenities that give each Sun Belt city its distinct vibe for under $5, it can create great value to the end-user, especially when their rent is cheaper than the person next door. 

Why the Sun Belt?

The Sun Belt consists of 18 states covering the lower third of the United States and includes seven of the ten largest cities, as well as many midsize metropolitan statistical areas. All of this is likely appealing to today’s young professional, who’s more likely to work from home than ever before. Even as a return to the office is imminent in some capacity, companies are also reconsidering the new work dynamic. Facebook and Google already provided employees with the opportunity to optionally work from home through the end of 2021, and possibly beyond, which means those employees no longer need to rent shoebox-sized apartments in New York City or San Francisco, and instead, can opt for something with more space, in a fair-weather city like Nashville, San Antonio or Baton Rouge. These cities offer the great dining, nightlife, and culture of city life, without the coastal price tag. 

Aside from working from home, jobs like manufacturing, where you need to be onsite anyway, are seemingly moving to the Sun Belt. Since the pandemic hit, Tesla already announced its building a $1 billion Gigafactory on the outskirts of Austin, while the leader in electric vehicles eyes Tulsa (who came in second to Austin for the Gigafactory) as a destination for its latest cathode plant. Beyond Tesla, Fujifilms is considering the Raleigh MSA for a $2 billion facility, proving companies across the world are generally finding real value in the Southern half of the United States. 

As some employees continue to take advantage of more lax work-from-home policies, and others shift toward manufacturing and other onsite jobs that are popping up across Sun Belt metros, we believe there’s an urgent need for apartments across the region, and it’s vintage multifamily that’s able to fill the void. As of 2021, an estimated $45 billion worth of product is available across the Sun Belt, and, considering institutional multifamily operates around 32 to 35 percent expenses, and some of these properties have a 60 percent expense ratio, you may be able to find real value, even if you exit at the same cap rate. 

Vintage multifamily apartments are on the rise as these properties provide renters with unique features that are unattainable with luxury apartments in the urban core. It is a sellers’ market as we continue to see many people across the U.S. moving out of houses, downsizing, and relocating. This has been accelerated by the pandemic as health, safety and financial stability have become focal points. Even as the world returns to some normalcy, vintage multifamily will continue to be a sought-after property type as given its affordability, additional space, and easy access to the urban core for both work and nightlife. 

Have Another
JLL Property Management COO Discusses Commercial Real Estate’s ESG Revolution