Bridging The Gap18 Jul 2017
The Strategic Role of Serviced Apartments in the Residential Real Estate Market
The global housing market is changing. Americans are abandoning their white-picket fences, two-car garages and neighborhood cookouts in favor of a penthouse view downtown and shorter walk to work, Time magazine reports. Europe is seeing more interest in urbanization and convenience to public transportation. Individuals are choosing to live in cities where they work, to experience community, convenience and reduced commuting. All these groups find that serviced apartments fill a gap in the real estate spectrum by providing new rent options. These apartments allow renters and business travelers flexibility and presents a new opportunity for operators and investors.
Serviced apartments, also called aparthotels, are fully furnished apartment units that provide the luxuries a traditional hotel does not. These buildings are centrally located in cities like New York, Boston, London and Zurich. Units provide guests with apartment amenities such as kitchens, laundry and flexible lengths of stay as well as hotel amenities including 24/7 concierge, fitness rooms, and community spaces. Aparthotels are gaining in popularity, but to understand why, we have to look at the past decade.
The Great Recession of 2008 forever changed the global homeowner dream. In 2015, home ownership in the U.S. declined from 69.2% in 2004 to 63.4%, the lowest level since 1967. The resulting decline has added to the renter population of approximately 43 million people.
According to the Joint Center for Housing Studies of Harvard University (JCHS) the growth in rental population happened across all income levels. “Millennials (born 1985–2004) are coming of age in record numbers, boosting the ranks of adults in their 20s—the prime ages for renting. Meanwhile, members of Generation X are remaining renters longer, pushing up the rates for 30–49 year olds. Baby Boomers are driving up the population aged 50 and over, while also renting at higher rates than the previous generation.”
Over the coming decade and barring any change in homeownership rates, the number of millennial renters will double to 22.6 million and the subsequent generation will add another 500,000 new households to the ranks of renters, the JCHS study indicates.
Because of this growth, the multi-family sector was the first to recover following the Great Recession and new supply has been coming online at an elevated level ever since. With the addition of renters, however, this growth is still too slow. The national rental vacancy rate averaged 4.6 % in the first three quarters of 2015, its lowest point in 30 years, reports the JCHS. “The short supply of units means ‘rental inflation is not going away anytime soon’,” Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC, wrote in a note to clients.
What does all this mean for an investor? Rising rents, low and declining vacancy rates, and double-digit growth in multifamily construction all point to strong rental markets. Multifamily property prices are also soaring, attracting new capital from investors and private lenders. In fact, construction of residences with five or more apartment units—multiplexes, condominiums, high-rises—have reached their highest share of overall construction since 1973, reports Time.
The Emerging Trends in Real Estate® 2016 research by PwC and the Urban Land Institute (ULI) highlighted that infrastructure investment is fast becoming an opportunity for the real estate industry in Europe as well. “Urbanization is happening at different rates in different cities and is strongly driven by new infrastructure and public transportation. For example, we in real estate developing residences close to a major new ring road, flyover and proposed metro line, as the improved accessibility will unlock significant value in our land. We believe that activity-based working models will develop further and that building flexibility for that into new commercial properties will be a key differentiator.”
To meet these needs, aparthotels are filling the gap between luxury rental apartments and the service, convenience, and flexibility of a hotel, said Derrick LaRosa, director of real estate, at BridgeStreet Global Hospitality, in his recent presentation at the Serviced Apartment Summit Americas.
“People are more transient today than they have ever been,” LaRosa said. “But that doesn’t mean they lack the desire to be part of a community, even for a short time. The market is ready for aparthotels, and with the ADR and RevPar growth at 6% year-over-year, this is the time to invest.”