Most cities across the country are still dealing with the impact of the COVID-19 pandemic. And this impact is most felt in the office market, where no one yet knows when or how companies will bring workers back to the office.
At the same time, major cities across the United States face a lack of affordable multifamily housing. While new apartment units are being added to the region’s housing stock, much of it is high-end, unaffordable to many renters.
Turns out, the fate of the office market might have a direct impact on the stock of affordable housing. We recently spoke with Anita Kramer, senior vice president at the Urban Land Institute Center for Real Estate Economics and Capital Markets, about both the uncertainty facing the office market and the state of affordable housing.
Our interview took place shortly after the Urban Land Institute released its 2022 Emerging Trends in Real Estate Report, which focused on both issues.
As Kramer said, a lack of affordable multifamily housing is an issue in almost every city in the United States, including in the Twin Cities market. Even lower-cost markets are seeing monthly rents rise, making it more difficult for many residents to afford an apartment unit.
The issue? A lack of supply. As Kramer says, there simply isn’t enough housing to meet the demand.
“It’s not only that there isn’t enough housing for certain income levels, but there’s also not enough housing overall,” Kramer said. “When there’s not enough housing, it increases the prices of existing units.”
That leads to the bigger question: Why isn’t there enough multifamily housing in the country?
Kramer points to several factors. There are zoning issues. Many communities don’t want more multifamily housing. They prefer single-family homes. That constrains the supply of apartment units in many cities.
Then whatever multifamily does get built today tends to be in the high-end side of the market. That keeps most renters out of the market, Kramer said.
A shortage of single-family housing is also impacting the multifamily market, Kramer said.
“It’s true that the single-family housing market is going gangbusters today,” Kramer said. “But there is still not enough single-family housing to meet demand.”
That means that the prices of single-family homes are rising, too. Because of this, some people who would normally buy into single-family housing are instead forced to look for apartments. This places more demand on the multifamily market. And that, again, causes monthly rents for apartment units to rise.
“There is simply not enough housing out there to accommodate household formation,” Kramer said.
Another challenge? The cost of construction continues to rise, thanks in part to the COVID-19 pandemic. There has been a significant increase on all the costs involved in construction, from labor to materials. That, too, is leading to a rise in rental costs.
Kramer did point to some solutions to this challenge. First, communities need to change their zoning to allow for more multifamily development.
Then there is technology. There is hope, Kramer said, that construction technologies and efficiencies will advance to the point that they will bring down the cost of building new multifamily developments. Unfortunately, that hasn’t happened yet, so it’s more of a long-term than a short-term solution to the lack of affordable multifamily housing.
Local and state governments can play a role, too, by offering developers financial incentives to build multifamily housing that is affordable to those earning less.
“If people want to live closer to urban cores and to their jobs, that land is quite expensive. So developers are starting with expensive land, a major cost,” Kramer said. “Then you add the costs of construction and you can see how expensive it can be for developers to build these projects. That is why they are saying that without some give on the part of the governments, without some sort of incentives or subsidies, it is very difficult for them to build market-rate or lower-income developments.”
There is hope, though. Kramer says that there are several developers who are skilled at putting low- and moderate-income housing projects together, taking advantage of various tax credits to do so.
“There is a segment of developers that has figured this out,” Kramer said. “These developers prove that this does work when there are strong government incentives.”
The future of office space?
Another challenge facing cities? All those vacant office spaces in the urban core. And it’s a problem that’s facing most major cities across the country.
Kramer said that Urban Land Institute researchers listed to nearly 2,000 senior real estate professionals across the country in putting together the 2022 Emerging Trends in Real Estate Report. And when it came to the future of office space, these professionals fell into one of two mostly similar camps, Kramer said.
The extremes are those companies that say they are going 100 percent remote and those saying all their workers will return to the office. But most companies are somewhere in between.
Kramer said one group of companies says it is bringing workers back to the office. They say this is important for their company culture. Employees need to interact with each other and form relationships at work. They need to find mentors. To accomplish this, their workers will be in the office at least three or four days a week.
The other group says that remote work has been successful. The companies in this group say that they can’t deny their workers the ability to work from home and avoid long commutes into the office. They say that their workers don’t need to be in the office more than two or three days a week.
As you can see, these groups aren’t too far apart. Both types of companies are looking at bringing in workers at least part-time in the office, while letting them work remotely on other days.
“We believe what the real estate professionals are telling us: The hybrid work model is here to stay,” Kramer said. “How it plays out, though, will be very interesting. There is such a full range of companies that is considering this model. There’s a recognition, too, that with a tight labor market workers and employees might be more in the driver’s seat today. They might want that hybrid model. Companies might need to offer it to attract the best talent.”
Office space might change because of this trend. The office might now be a space where people come to collaborate while they handle their more heads-down type of work remotely, Kramer said.
In terms of the office buildings themselves, there’s already been a flight to quality, Kramer said. Many companies are moving to higher-quality office buildings with better ventilation and other amenities. This could lead to a bifurcation in the office market: Newer, higher-quality office buildings will continue to attract tenants while older office space steadily grows obsolete.
As Kramer said, this connects to the housing market. Will developers transform those older office buildings into multifamily housing? And if they do, how will that impact the stock of affordable apartment units?
“Office has this new demand factor that wasn’t there before the pandemic,” Kramer said. “There isn’t going to be an abrupt change, but as companies get closer to making long-term decisions, we’ll see how it affects the overall office demand. Companies still need their office space. But how they use that space will change.”