Multifamily News Roundup – Q2 2019

Three of the Biggest Real Estate Stories of Q2 2019

The second quarter of 2019 suffered no shortage of news stories in the commercial real estate and multifamily world. Below are three of the most significant stories from the past quarter.

New York State Rent Regulations

New developments continue to pour out of New York state, where Governor Cuomo signed into law some of the nation’s strongest rent control provisions in June. The new regulations drastically shrink the ability of multifamily owners to make affordable apartments market-rate and to increase rents as leases end. Apartment owners in the state were shocked by the law’s passage, as it signals a new era of colder relations between Albany and real estate interests.

The law has already begun to have consequences in the state. Apartment building sales within New York City fell by a whopping 48% in the first half of 2019, compared to sales data from the first half of 2018. Huge, well-capitalized investors may swoop in to save the day as buildings begin to enter foreclosure, but for now the market remains still, as owners, buyers, and brokers are unsure how to proceed.

Despite lobbyist failures to prevent the bill’s passing, the industry has not backed down completely. Lawsuits filed by the Community Housing Improvement Program and the Rent Stabilization Association could see the regulations reversed, and possibly result in the end of rent regulation nationally if the case makes it to the Supreme Court. That last scenario may be unlikely, as the Supreme Court has previously upheld rent controls as constitutional.

Google (and Big Tech) Enter the Housing Game

San Francisco is the second most expensive city in the United States, with an average home price of a whopping $820,000. The high cost of living comes courtesy of thousands of high-earning tech workers who commute to the offices of companies such as Facebook, Google, and Apple outside San Francisco’s city limits. The rise in the cost of living within the city has meant more and more people are heading to other Bay Area locations such as Oakland, meaning some longtime residents can no longer afford to stay.

Enter Google. In a move similar to Microsoft’s program in Seattle, the search giant has promised to assist in the construction of some 20,000 homes. Google CEO Sundar Pichai has indicated some $750 million of land will be rezoned from commercial use to residential use, and that a $250 million dollar investment fund will provide incentives to developers and builders to make 5,000 of the 20,000 homes affordable.

Google’s pledge means employers in two markets (Seattle and the Bay Area) have intervened in an effort to resolve a crisis they have helped create. For multifamily investors, it may seem like a new class of competitors with practically infinite wealth have entered an already competitive market, but that is not the case. These programs are more nuanced than simply creating real estate wings of two established companies. Microsoft’s $500 million pledge will go toward preserving existing housing and creating new housing by financing low-interest loans. The bulk of the value of Google’s $1 billion pledge comes directly from the value of the land they are donating. The cash portion of both pledges exists mostly to motivate existing developers and builders by offering a new source of financing, not to compete with them directly.

Co-Living Companies Expand

The typical verticals for multifamily are market-rate or affordable apartment complexes, student housing, and senior living. However, a new trend is heralded by the arrival of companies with names including Ollie, Quarters, and Common: co-living. Originally focused on dense, tech-heavy, coastal cities such as San Francisco and New York City, companies have begun expanding to other cities.

Common, the biggest incumbent in the space, has serious ambitions. The company intends to spend some $300 million in an effort to create some 2200 beds in markets including Philadelphia, Atlanta, and Pittsburgh. Unlike earlier phases in the company’s history, Common will now rely heavily on local partners to construct and operate these new facilities, accelerating their ability to expand.

For traditional investors and developers, it remains early to decide whether co-living will pay off. For students leaving college and moving to a new city, co-living can offer potential new friends and otherwise expensive amenities such as dog walking and cooking classes. For families, though, the lack of private space has obvious disadvantages. Sustained economic growth in 2019 will mean more money should pour into co-living, giving established companies more data to decide what their relationship with the new vertical should look like.