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    3 Things Developers Need to Know About Multifamily Real Estate in 2023

    Staying informed about the multifamily real estate market will be crucial to the success of real estate developers in 2023. Despite ongoing economic uncertainty, market analysts believe the sector will perform well this year, with strong demand driving a 95% occupancy rate and 4% rent growth.

    That said, the industry is continually evolving, with new regulations, construction technologies, and market trends gaining prominence every day. Understanding how those factors shape the broader marketplace is essential to identifying and capitalizing on the best opportunities.

    Stay informed with these crucial insights on the multifamily real estate market in 2023.

    Sustainability Regulations Require Greater Attention 

    As cities and states increase focus on achieving their sustainability goals – over 130 U.S cities are committed to net-zero carbon emissions by 2030 - development teams must be aware of the laws that will affect their multifamily projects.

    New York City’s Local Law 97 is just one example of the stricter regulations that demand the attention of property owners nationwide. The law requires landlords to reduce the carbon footprint of their buildings by 2024 and levies hefty penalties on violators. A study ordered by the Real Estate Board of New York found over 3,700 properties are out of compliance and could be subject to $200 million in fines next year. And the consequences of not taking ESG standards seriously will only become more severe over time.

    The study determined that non-compliant owners will be on the hook for $900 million in penalties by 2030. And 60% of the properties impacted by regulations coming into effect are multifamily rentals. 

    That means there’s a significant incentive for Big Apple landlords to pursue green fit-outs on an aggressive timetable. In the current economic environment, saddling apartment complexes with large, unexpected operating cost increases will generate significant negative leverage and mortgage defaults. Accordingly, development teams should familiarize themselves with the specifics of regulations like Local Law 97 to understand how to help owners make their facilities eco-friendly.

    Firms should also consider incorporating sustainable building features such as energy-efficient electrical systems, green roofs, and solar panels into new multifamily projects. In addition to meeting new ESG standards, those amenities can lower utility costs and increase a building’s attractiveness to the growing population of environmentally conscious tenants.

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    The Cities with the Greatest Opportunities for Multifamily Development

    Crexi recently named New York as America’s number one metro market for multifamily property development for reasons other than its pressing need for green renovation. The firm reported that 67% of its householders lease their living spaces, and high demand kept occupancy rates stable even with a 27% rent increase last year. Given its geographical constraints and mortgage rates at a 15-year high, it isn’t going to lose its title as the “city of renters” in 2023.

    However, it’s far from the only metro with excellent prospects for residential building development this year.

    Nashville, Tennessee, is one of the country’s fastest-growing cities in the U.S. thanks to its robust culture and job market. The area’s thriving entertainment, healthcare, and education sectors grew its population and employment rate by 2% year-over-year in 2022. Those conditions resulted in a new property occupancy rate of 84% - up 5.6% from 2021 – and a 9% increase in rental revenue.

    San Diego led the pack in the West, with 53% of its 3.3 million inhabitants living in rentals and leasing revenue rising 10%. Because the metro has a young population, an average income of $48,380, and a pleasant climate, it has a strong demand for apartments. Crexi indicated it has greater potential for successful multifamily real estate projects than any other California city.

    Plus, demand for rental properties will continue to increase in 2023. With widespread economic uncertainty and sky-high interest rates, many people are opting to rent rather than buy homes. Until interest rates normalize, select urban multifamily markets will benefit from strong tailwinds.

    Development teams can more easily secure funding for new residential complexes in those regions than in other areas. Even risk-averse banks and institutional investors can see the benefit of creating new housing in economically prosperous metros. The key to recognizing the best urban multifamily opportunities is conducting exhaustive research and running data-driven project scenarios.

    Prefabrication Is Gaining Momentum

    According to Propmodo, prefabrication, which involves creating building components remotely and then assembling them on-site, is becoming an increasingly popular option for multifamily projects. In 2022, residential housing cultivated more growth in the manufactured building industry than in any other sector.

    Developers have found the construction method increasingly appealing because of its comparatively low costs and short construction times. Like the rest of the industry, the residential building segment has been hindered by labor shortages and raw materials bottlenecks in recent years. But prefabs circumvent those issues by mass-producing structures in factories using unconventional materials like shipping containers and bamboo flooring. 

    By embracing manufactured housing, project teams have been able to address the country’s unmet need for more than 600,000 apartment units.

    In the past, prefabs had a bad reputation as buyers viewed their affordability as a reflection of low quality. Conventional wisdom was that bringing them into traditional neighborhoods hurt property values. However, the field has evolved since then, with new technologies enabling much greater quality control than disco-era mobile homes.

    Prefab multifamily projects also offer multiple ESG benefits. Manufactured housing construction uses 67% less energy than conventional buildings, and their assembly produces less than half of the material waste of on-site builds. Several modular residential property developers are leaning into the advantage by running net-zero carbon emission operations and commonly outfitting their structures with renewable energy systems.  

    Since researchers believe 4.3 million multifamily units needed to be completed by 2035 just to meet demand, prefabs could offer developers a green and cost-effective way to resolve the affordable housing crisis.

    Want more insights about the factors driving the commercial real estate market? Subscribe to our newsletter to remain up to date on the developments and trends shaping the industry on a national and regional level.

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