Trends in the Apartment Sector: How To Take Advantage of Shifting Demographics

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1 Trends in the Apartment Sector: How To Take Advantage of Shifting Demographics WILLIAM J. FERGUSON Chief Executive Officer, Ferguson Partners TRAVIS KONONEN Managing Director, Ferguson Partners

2 TRENDS IN THE APARTMENT SECTOR: HOW TO TAKE ADVANTAGE OF SHIFTING DEMOGRAPHICS Multifamily property owners and lenders are benefiting from the shift to mixed-use spaces as more projects integrate housing, retail and recreation spaces to attract people looking to live close to amenities, transit and city centers. Many analysts predict a downturn for apartment real estate investment trusts (REITs) as rent increases slow and more multifamily units come onto the market. It is unclear if the demand for apartments by millennials and aging boomers will be enough to offset some of the slowing growth trends in the industry. While many millennials are renting longer as they delay home purchases or decide to spend their money elsewhere, there are signs of oversupply in the multifamily market, particularly in expensive urban areas. Multifamily developers, REITs and other owners need to analyze these changing consumer demands and make sure they have the right leadership in place to best position themselves to take advantage of these new trends. Changing demographics Multifamily development experienced an early rebound after the financial crisis, which centers. This is slowing a little with multifamily construction permits dropping about 13% in 2016 from 2015, with housing starts falling 3%. Completions were up 2% to 315,000 units in 2016, according to Freddie Mac data. 2 Millennials entering the job market are prime candidates for rental apartments, particularly as they deal with student debt and tightened mortgage lending standards from banks, making purchasing a home more challenging. After seeing many homes lose value, millennials are more interested in having a flexible lifestyle than investing in real estate, driving increased demand for multifamily units. 3 People under age 30 make up 51% of the rental market, and many are choosing to delay home purchases. Homeownership for people under age 35 fell to 35% in 2015 from a high of 43% in Many are delaying starting families and purchasing homes, driving demand for apartments in city centers or close to entertainment, dining and recreation experiences. In order to compete, developers and investors are looking to implement amenities such as new technology, helped spur new construction, according to a PwC report. 1 Much of this development is already online, particularly in major urban 2 outlook.pdf

3 community activities, recreation options and other experiences. 5 Also squeezing younger renters is the increased demand from baby boomers, with many looking to move closer to urban amenities now that their children have moved out. Much of this demand is for higher-end luxury spaces within walking distance of restaurants, shopping, entertainment and other city amenities. The number of households of people age 55 and older is expected to reach 50 million by 2035, indicating the demand for multifamily is likely to continue to be strong. As housing prices remain robust, that gives older homeowners the opportunity to sell singlefamily homes and move to new communities. 6 Multifamily developers who add design elements and programs that appeal to older adults can help units stand out. For example, musician Jimmy Buffett is partnering with a Florida developer to build a themed lifestyle community in Daytona Beach for those older than 55, including spa, fitness center and food options. 7 New Jersey s BNE Real Estate Group is building a low-rise development on the water with 160 one- and two-bedroom units, offering the feel of single-family homes instead of dense urban living. The development features a refurbished historic home for community activities and amenities such as yoga, pool, greenways and other recreation options. 8 Developers must also be sure to not overlook technology. According to a 2014 survey, 58% of boomers want technology that helps with home maintenance, 64% are looking for technology that helps connect them socially and 76% are looking for home health monitoring services. 9 Current market trends Despite increasing demand from both millennials and baby boomers, some investors are concerned there is an oversupply of multifamily units since construction has been aggressive. In areas such as San Francisco, New York and Seattle, many investors are seeing rents drop and decreases in operating income, according to PwC. 10 There is also a coming ceiling on rent growth. How much is too much to actually charge? This is a challenge, particularly for REITs that count on steady rent increases in order to continue quarterly dividends. As growth slows, developers and owners will need FERGUSON PARTNERS 3

4 TRENDS IN THE APARTMENT SECTOR: HOW TO TAKE ADVANTAGE OF SHIFTING DEMOGRAPHICS to stay ahead of trends, specifically target renters, and offer more to compete and keep buildings occupied. To combat some of the slowing growth in large urban centers, many are considering projects outside of major cities along mass transit hubs. For example, many young professionals and empty nesters are leaving the high rents of Manhattan and Brooklyn for mixed-use multifamily developments along the Long Island Rail Road or Metro-North corridor. 11 The same is true in Dallas where 82% of the new multifamily units built from Jan to Sept were in areas outside of the urban core. 12 There are also smaller cities showing strength in multifamily. There is an influx of new residents in places such as Nashville, Atlanta, Charlotte and Austin. Areas like these have recovered quickly from the economic downturn, are attractive to millennials for their entertainment and recreation options, and have thriving job markets. They are also interesting to investors since there are ample opportunities for local and national investors, according to PwC. Conclusion To compete and attract tenants, multifamily owners and managers must be creative in offering amenities that appeal to a variety of residents from millennials to boomers. Combining shopping, entertainment, recreation and other communal spaces with access to transportation or proximity to city amenities can help ensure developments are attractive to many types of people. For Boards and executives, that means expanding their talent pools to include individuals with backgrounds and experiences in a variety of industries and sectors. Adding those with retail, entertainment and recreation expertise to their ranks of asset management professionals will help make sure they are positioned to capitalize on shifting demographics and demand. Boards would also do well to add younger executives as well as those with experience in nontraditional sectors such as technology, retail and entertainment. Diversifying the types of people represented in upper management as well as the pipeline of talent being groomed for promotion will help urban-core-vs-suburbs-apartment-locations-may-surprise/#358f3d66c141 apartment owners, developers and managers capitalize on current trends and prepare for the future. 4

5 Mr. Ferguson serves as Chairman and Chief Executive Officer of Ferguson Partners and as the Co-Chairman and Co- Chief Executive Officer of FPL Advisory Group. Mr. Ferguson conducts senior management recruiting assignments, with a specialization in president/chief executive officer searches and recruiting assignments for Boards of Trustees/Directors. WILLIAM J. FERGUSON Chief Executive Officer Ferguson Partners wferguson@fergusonpartners.com He also facilitates public company Board assessments and senior management assessments. Before founding Ferguson Partners, Mr. Ferguson was a Managing Director with one of the leading international executive recruiting consultants. There, he co-managed the firm s national real estate practice. Prior to focusing on real estate, Mr. Ferguson worked for General Mills, Inc. in Minneapolis in strategic marketing. Mr. Ferguson holds a Bachelor s degree from Harvard University, where he was a member of Phi Beta Kappa, and an MBA in marketing from the Wharton Graduate School of Business. Travis Kononen is a Managing Director at Ferguson Partners. He specializes in the REIT, real estate private equity and investment banking sectors, executing mandates in the US, UK, and continental Europe. Mr. Kononen furthermore maintains close links with INSEAD and the London Business Schools real estate programs. Prior to opening the San Francisco office, he spent six years in the firm s London office, and three years in the Travis Kononen Manging Director Ferguson Partners New York office. Mr. Kononen has a degree from Oregon State University. tkononen@fergusonpartners.com FERGUSON PARTNERS 5

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7 About FPL FPL is a global professional services firm that specializes in providing solutions to the real estate and a select group of related industries. Our committed senior professionals bring a wealth of expertise and category-specific knowledge to leaders across the real estate, infrastructure, hospitality and leisure, and healthcare services sectors. Comprised of two businesses that work together, FPL offers solutions and services across the entire business life cycle: Ferguson Partners With an emphasis on the right fit, Ferguson Partners offers services in executive and Director recruitment,. We also offer a full range of leadership services including CEO and senior executive succession planning, leadership assessment and coaching, and team effectiveness. FPL Associates Focusing on a wide array of business needs, FPL Associates assists with the assessment, design and implementation of compensation programs. We also provide organizational, financial & strategic consulting, bringing a wealth of industry and category-specific expertise to a broad range of projects. Our service offerings FERGUSON PARTNERS FPL ASSOCIATES EXECUTIVE SEARCH LEADERSHIP CONSULTING COMPENSATION CONSULTING MANAGEMENT CONSULTING Board/Trustee Recruitment Board Assessment Chairmen/CEOs/ Presidents Senior Management/ Corporate Officers Succession Planning Assessment for Selection or Development Executive Coaching Team Effectiveness Benchmarking Program Design Contractual & Policy Arrangements Surveys Strategic Planning Organizational Design Corporate Finance Specialized Research Our industry practices Real Estate Private Equity/Real Estate Investment Managers, Public (REITs) & Private Owners/ Developers, Property Services (Brokerage) Firms, Commercial Finance, Residential Mortgage Investment/ Finance, Homebuilders, Corporate Real Estate Hospitality & Leisure Lodging (Brands/Owners), Gaming Resorts & Sports & Recreation, Amusement Parks & Attractions Healthcare Owners/Investors/ Operators/Financiers of Seniors Housing, Hospitals, Health Care Infrastructure, Engineering & Construction Infrastructure Investing: Transport, Energy, Social Infrastructure; Construction & Engineering Mortgage Investment/ Casinos, Restaurants, Service Providers Our office locations CHICAGO HONG KONG LONDON NEW YORK SAN FRANCISCO SINGAPORE TOKYO TORONTO 2017 FPL Advisory Group. The Ferguson Partners recruitment practice consists of five affiliated entities serving FPL s clients around the world: Ferguson Partners Ltd. headquartered in Chicago with other locations in New York and San Francisco, Ferguson Partners Canada Co. in Toronto, Ferguson Partners Europe Ltd. headquartered in London with a Japan branch located in Tokyo, Ferguson Partners Hong Kong Ltd. in Hong Kong, and Ferguson Partners Singapore Pte. Ltd. in Singapore. Ferguson Partners Europe Ltd. is registered in England and Wales, No , Registered Office: 100 New Bridge Street, London, EC4V 6JA. Ferguson Partners Singapore Pte. Ltd. is registered in Singapore, Business Registration No. (UEN) H, Employment Agency License No. 12S6233. FPL Associates L.P., the entity which provides consulting services to FPL s clients, is headquartered in Chicago.

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