Trends to watch in the multifamily sector

Above: Mark-Taylor recently opened San Valencia, a 382-unit community in Chandler, Ariz. The hub of the community is the fully equipped clubhouse for socializing and community networking, and the iconic Mark-Taylor lagoon-style pool. Other features are sand volleyball courts, a large dog park and children's tot lot. Apartment amenities include stainless steel appliances, distressed wood-like plank flooring, pendant lighting, full-size washer/dryer and private balconies or patios with storage. (PRNewsfoto/Mark-Taylor) Real Estate | 25 Sep, 2018 |

To identify the multifamily trends that people working in commercial real estate should know about, AZRE talked with Chris Brozina, executive vice president at Mark-Taylor Companies.

Chris Brozina is executive vice president at Mark-Taylor Companies.

AZRE: Downtown urban areas (Phoenix, Tucson, Gilbert, Mesa, Scottsdale) seem to be drawing much of the current multifamily development in the Valley. What’s driving this trend?

Chris Brozina: Equity. Developers develop where their equity source tells them to develop and that reflects, at least theoretically, where people want to live in apartments. The important point to understand, however, is that institutional-equity is generally headquartered on the coasts and almost never coming directly from Arizona. This means there will always be a coastal-market thought influence directing where equity is placed in a market like Phoenix. Today, the coastal, denser market trend is to build more mixed-use, dense, walkable apartments in locations that are suitable. You can see that influence in Phoenix today.

AZRE: How do you balance the expectations of residents who are looking for higher-end amenities with the higher cost of development that comes with these expectations? How do you balance the demand vs. costs when developing new communities? 

Chris Brozina: It’s a pretty simple business – income from the community, once stabilized, must exceed the costs to develop. Obviously the key then, is predicting those two elements as accurately as possible. Every element of the development, from location, to subcontractors, to timing exerts pressure on one of those two elements. Developers will continue to build to a higher level of luxury so long as it translates to higher level of rent and vice versa. What you see today, later in an expansion, is so much pressure on both rents and costs, that everyone is slicing the pie thinner looking for smaller nuances to differentiate their product and generally accepting a lower margin of error. The biggest costs elements in a project are large trades like framing, concrete, roofing and drywall. These things don’t change no matter what type of finishes you are putting in the apartments. At some point, cost becomes too high to develop any longer. 

AZRE: How does Mark-Taylor attract the interest of Millennial residents? 

Chris Brozina: Mark-Taylor doesn’t specifically target any one demographic or another – our objective from the outset is to build a home that is timeless and universally attractive to the broadest range of residents possible. Certain things will always be universally attractive in our minds: a secure, “peace of mind” for yourself, your pet, and your vehicle; large, livable floor-plans that can accommodate real furniture; open floor-plans; well-scaled, useful amenities; and extremely clean, well-manicured grounds, will never go out of style. Decade to decade, our mission is to keep a focus on the fundamentals.

AZRE: What’s the biggest challenge facing Mark-Taylor today? 

Chris Brozina: In our development business, our challenges are probably similar to most other developers: late-cycle costs and construction labor shortages have pushed costs to the threshold of where development is feasible. In our operations business, employee recruitment and retention is especially critical given the heat in the market. Multifamily has become a darling investment vehicle in the last 10 years and more capital is moving into the space than ever before. The industry is becoming more scientific; more investment is being made into increased accuracy: accuracy in underwriting, accuracy in market fundamentals, accuracy in when to buy/when to sell and it is imperative, that we as the property manager, are just as talented, informed and well-trained to stay in front of the expectations. The property management business is getting significantly more sophisticated and over the next 10 years and we intend to lead that movement.

AZRE: How has the booming residential single-family market impacted the multifamily industry?

Chris Brozina: Is it helping create more demand or further raising expectations that multifamily residences need to stand out with design, amenities? There is not a significant impact today. There will always be a natural filter of apartment residents to homeownership, but in a macro sense, multifamily turnover (those that don’t renew a lease at the end of its term) is lower in Phoenix today than it has been at any point since we began tracking in 1982. Significantly lower. The amount of natural apartment demand that comes from new jobs added to the Phoenix market is scientific and has held true for generations. Today, there is more demand for new apartments than supply of new apartments, as hard as that may be to believe. The operating fundamentals support that fact.

AZRE: For years there’s been talk that we are overbuilding in the multifamily sector. Do you agree or disagree? 

Chris Brozina: As the answer above alludes, in a rolling, macro sense, the market is not over-built today. No accurate operating data shows that. With that said, 2018 and 2019 are expected to be the first years where actual annual deliveries outpace actual annual demand for the first time this cycle. Developers have been refreshingly disciplined this cycle, which is probably a function of tighter financing and more conservative equity. We’re probably at a time now, where certain submarkets with heavy pipeline concentrations, will have localized supply/demand issues that could cause some pain, but it will likely be temporary pain.

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