Written by: Cody Carey
As a Vice President in Multifamily Capital Markets, Cody works with a team of professionals who focus on multifamily properties across the country. With his expertise of the Greater Columbus Region, he works collaboratively with his team to lead multifamily investment sales and equity capital markets activity for clients. Keep reading to get Cody’s take on the current state of the Columbus Multifamily market.
What significant trends are locally and nationally shaping the multifamily real estate market?
A few things are impacting the multifamily market: demographic shifts and the stickiness of baby boomers in real estate, interest rate volatility and capital stack concerns, and operating and construction costs.
Baby boomers (Ages 60-78), the second largest generation cohort in the United States, are holding onto their single-family homes longer, and more than half of baby boomers own their homes free & clear. According to 2022 U.S. Census Bureau data, 53.6% of the homes are owned by individuals over 55, while home ownership for those under 35 was just 12.2%. That's more than half the homes for an age demographic, about one-third of the United States population. In 2021, according to Statista, there were 82 million single-family homes, and Liberty Street Economics reported that 14 million of those homes were refinanced during the historically low-interest rate period from 2020 to 2022. That's 17% of the total supply of single-family homes refinanced quickly, leaving homeowners with stronger balance sheets.
Despite historic interest rate rises, housing prices continue to increase due to the imbalance in supply and demand. Behind the Baby boomers is the largest generational cohort, the millennials (ages 28-43), and then Gen Z (Ages 12-27). Both generations comprise over 42% of the country's population, and only a third of Gen Z has entered postgraduate ages, where they are expected to find housing and live independently. We haven't built enough nationally, and we're playing catch-up; housing with density is the most efficient way to do so.
Another major trend that has greatly impacted the multifamily investment industry has been the consistent volatility of interest rates. Everyone just wants to see stability. The Fed raised its Fed Funds Rate from .05% to 5.32% in just seventeen months, the most aggressive interest rate hiking campaign in history aimed at combatting inflation. This greatly impacted developers and value-added multifamily buyers, who typically must execute with floating rate debt.
Trepp, an industry-leading CMBS and commercial real estate loan securitization database, is currently tracking that 11.97% of multifamily loans in the top 25 MSAs have a Debt Service Coverage Ratio below 1.0. While delinquencies of the same markets only average 1% of multifamily properties tracked, a lot of property requires cash payments into the deal. This has required investors to operate their assets creatively and defensively.
Although multifamily has continued to serve as the darling asset class for capital, liquidity has also been significantly impacted due to interest rate hiking and long-term treasury volatility. In 2023, there were 12 weeks with over 25 bps fluctuation in the 10-year treasury. That's 23% of a 52-week year that investors had to weather and make decisions for acquisitions and dispositions. Imagine being under contract, and a week later, purchasing power completely shifts. Those problematic conversations have left the transaction market timid through 2023.
Lower liquidity and minimal pricing transparency caused significant heartache in the transaction market. Take Columbus, for example; through Q2'2022, there was about $2.4b of transaction volume. Through Q2 2024, Real Capital Analytics is only tracking transaction volume of $678m. That's 25% of the trade volume just two years ago.
The market is still flush with cash seeking to transact multifamily. The call is for stability in the macroeconomic environment.
Lastly, the other main concern in the industry right now is the inflationary nature of construction costs and operating expenses. On the operating side, labor, insurance, and materials have increased significantly. Since 2020, the BLS has reported that average hourly earnings have risen by 22.3% as of June 2024. We've seen insurance costs double or triple in certain cases, and materials for renovation have compressed returns on conducting renovations. All these factors, and more, are diminishing operations and crunching investors' bottom lines.
When talking about construction costs, everything has become more expensive to build. Hard costs, soft costs, and interest expenses have all risen significantly, and multifamily developers are competing for the same labor and materials being used in all the major manufacturing and infrastructure projects ongoing nationwide. When costs go up, developers have to bear the risk of delivering units at new heights of market rents.
What types of multifamily developments (luxury, affordable, mixed-use) are currently in high demand in Columbus?
That's a great question. Personally, my opinion is that everything is in fashion in Columbus.
Columbus historically has been a suburban garden-style market, but we're starting to experience a large push for density and urbanization. There's a lot of land surrounding Columbus, so we're still seeing a tremendous amount of amenities workforce garden-style products in the suburbs. Suburban development is less risky because developers don't have to pro forma new heights of rents because construction costs are lower, land prices are lower, and the leasing season is a little less cyclical. Higher-density, four-story garden-style projects have become more prevalent, but the three-story pitched-roof product is still the most pervasive.
On the flip side, our downtown and urban core has seen a major influx of luxury multifamily development. Over the past two years, our central business district saw more than a 50% increase in housing supply, mostly tailored to young professionals and the demands of an active lifestyle. Urban development is more complicated and more costly, requiring significantly higher rents to make it feasible. This makes for a riskier project for the developer, but they understand that the current generation of renters desires an exciting urban experience.
Parking is the main concern for urban luxury developers, and a concrete parking structure can destroy developers' pro formas. A handful of new multifamily developments have recently been delivered. Once leased up, they will provide the market with tremendous insights into the depth and demand of this type of renter pool. Most projects require public assistance with parking, and we need more of it.
Lastly, the Build-to-Rent (BTR) product has exploded since the COVID-19 pandemic. This product is typically built with luxury finishes and is the type of density for which suburban municipalities lean favorably. Build-to-Rent's hypothesis is to capture two of the largest cohorts of the population, the empty-nesting Baby Boomers and the Millennials and Gen Zers who are starting their families but prefer to rent or are priced out of purchasing a home. It's typically a sticky tenant base and a great transition product. We are seeing an influx of BTR products built on Columbus's northern arc.
How has the remote work trend impacted the demand for multifamily units? What are the key factors driving multifamily housing growth in Columbus, Ohio?
Demand for multifamily units has been impacted by remote work in a few ways. We've seen the demand for Build-to-Rent explode since the pandemic. Traditional multifamily development has had to rethink the selection of their unit mix, amenities, and common spaces throughout the property. Demand for two-bedroom units, or more significant, has increased significantly with the work-from-home trends, with residents electing to use a second bedroom as office space. Common spaces have had to incorporate more hybrid workstations, private office spaces, and conference rooms. Residents simply demand more space, creative space, and different spaces.
Based on development data provided by CoStar, total units developed by bedroom had some notable shifts as a percentage of total supply delivered throughout the Columbus MSA, three-bedroom and four-bedrooms saw a spike from 3% and less than 1% from 2010-2019, respectively. From 2020 to the present, those comprised 6% and 2% of the unit mix delivered. However, the two-bedroom share dropped to 50% from 56% in the same period, with studios jumping from 2% to 4%. Although contrary to expectations, this is primarily due to developers betting on delivering lower chunk rent units and leveraging the construction cost efficiencies of studios to combat the rising cost environment.
Columbus' multifamily housing growth is driven by significant economic development investment and the influx of employment opportunities in diverse industries. Ohio ranks 7th in Bipartisan Infrastructure Bill funding, only behind states with at least one primary market city in the top ten by population. If you drive around Columbus, construction is everywhere. The largest percentage increase in employment comes from mining, logging and construction, and education and health services, with respective increases of 8.3% and 4.1%. These industries require an active presence at work rather than being capable of remote work.
The other factor that is driving our multifamily housing boom, from a demand perspective, is the market's affordability. In the age of technology and remote work, it's become more accessible for people to wager different cities when considering their move. We don't have sunshine and beaches, but we have affordability and opportunity. It has indexed against New York City; Columbus, OH indexes at 53.6 on the Cost of Living Plus Rent Index. On just the rent index alone, Columbus, OH, scores 37.1. This ranks 28th and 32nd, respectively. Meanwhile, the City of Columbus is the 14th largest city and quickly climbs the ranks in terms of MSA. It's also vastly cheaper to rent in Columbus than purchasing a residence.
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