By: Ari Rastegar, Founder and Chief Executive Officer of Rastegar Property Company
COVID-19 has touched every facet of the economy and is leaving its fingerprints on the future. No sector has been immune. In our real estate domain, this translates into a surge of interest in what we call vintage multifamily apartments. In fact, we’ve seen some of the highest leasing activity in our history. Sometimes called garden-style apartments, vintage apartments are multifamily communities, usually less than four stories, surrounded by landscaped grounds, common outdoor areas for tenants and open breezeways. Often, they are located in a more suburban setting away from dense urban areas.
Our firm has been bullish on this subgroup within the broader multifamily asset class for some time. We believe it possesses significant barriers to entry for competitors, has a great value proposition, and can increasingly be an affordable option for people who want to be close to desirable suburban locations.
To better understand the drivers of this increased demand, we analyzed the data and noticed two overall trends. The first is a short-to-medium-term trend driven mostly by current economic uncertainty and immediate considerations in a COVID world.
The second trend is longer term in nature. It relates to fundamental changes in the nature of our workforce and has profound implications for the future. In a way, the coronavirus has exacerbated and accelerated trends and issues that were already bubbling beneath the surface.
Economic Uncertainty = Premium for Flexibility
Pre-pandemic, we were already seeing an increased interest in renting versus buying. Propelled by lack of affordability and an inability to secure financing, buying a house was simply not an option for many people. Another contributing factor was a shift in attitudes toward renting, which appear to be linked to generational preferences.
Millennials, a key demographic for our business, exhibit less overall interest in property ownership. The fact is that millennials are changing jobs more than any prior generation, a trend we expect to continue. We believe this will translate into a huge demand for future apartment rentals.
What COVID-19 did was help fast-track the movement from buying to renting. Underlying economic insecurity has forced many people to cut expenses and shy away from long-term commitments like mortgages in favor of short-term obligations like renting. The prospect of a long-term mortgage, property taxes, maintenance costs and potential foreclosure risks has made renting an attractive option.
Reducing Community Density— Leaving the High Rise for the Mid-Rise
The fact that we are all spending more time at home means that space is a premium. As living spaces have also become our schools, workplaces and the like, there are greater demands on this area than ever before. As such, a shift from dense urban developments to more affordable, less dense communities with more living and outdoor space makes sense. Remote workers may find that the larger capacity of typical vintage apartments may now provide a home office zone.
Living in a Pod — Benefits of Smaller Communities
Smaller-sized vintage multifamily communities make it easier for residents to minimize contact with people they do not know. In dense communities, shared spaces like elevators, gyms and co-working spaces—things that might have been considered benefits in a pre-coronavirus world—now translate into greater opportunities for infection in a COVID world. Since many vintage housing complexes lack these “amenities” the resulting risks are minimized.
For example, in dense communities, elevators represent one of the more difficult COVID risks to avoid, as the small enclosed spaces pose challenges to both ventilation and social distancing. However, since most vintage or “garden style” complexes don’t have elevators, residents walk directly up to their doors, their exposure to shared spaces is significantly reduced.
Vintage communities also emphasize availability of outdoor space, which many traditional high-density complexes lack. When you combine this with fears about airborne transmission via ventilation systems or through plumbing, we believe lower-density communities hold greater appeal for virus-wary renters and will continue to do so in the future.
Cost of Living Arbitrage
Prior to the pandemic, we were seeing a trend of people migrating from higher cost, higher tax areas like California or New York to less expensive markets in other parts of the country. In Sunbelt markets (the lower third of the country, where most of our assets are located), we’ve seen continuous population growth. For example, the Austin area, where we are headquartered, saw population growth of 2.8 percent in 2019.
We expect this trend to continue.
Long-Term Structural Issues Pushed Forward by COVID
The longer-term structural issues that the pandemic has accelerated are many, but let’s focus on two: business digitalization and remote work. A McKinsey study found that because of COVID-19 we have “vaulted five years forward in consumer and business digital adoption in a matter of around eight weeks.” The implications for our future are profound.
The Future – Home Is Where the Work Is
We believe that a significant segment of the population will move to a permanent work-from-home scenario. Many people who rent will desire larger spaces and perhaps even more of a community feel. Businesses will have to make similar choices. Do they hold on to high-priced real estate in central business districts or opt for more cost-effective space in nearby suburbs?
Given the economic uncertainty, the need to adhere to virus suppression protocols and increased automation, the prospect of having surplus unused office space will beg the question: Is it worth it? Perhaps instead of having a central campus, businesses will begin to have smaller campuses spread across many smaller buildings. Suburban areas where a lot of this inventory exists may see an influx of people moving to these locations.
For all of the tumult COVID has wrought, it has also presented an opportunity for reflection and cuts directly to what is important. As real estate investment managers, we found our best approach is to remain calm, collected and to think strategically.
Given all of the tailwinds and uncertainty, it is our thesis that multifamily properties are in an excellent position for this moment. Furthermore, we are very aggressive on vintage properties because they possess all the ingredients to thrive in a post-COVID world. Like the Phoenix rising from the ashes reborn to soar at even greater heights, we believe that the new post-pandemic world can be even more resilient and better.
About the Author
Ari Rastegar is the founder and chief executive officer of Rastegar Property Company, a technology-focused private equity real estate company based in Austin, Texas. As an entrepreneur, he has built portfolios as an investor, developer and manager spanning 38 cities and 12 states encompassing more than 5,000,000 square feet of properties. He considers himself a contrarian thinker, and a lover of recession-proof assets.
The views and opinions expressed in the preceding article are those of the author and do not necessarily reflect the views of The DI Wire.