The Tax Cut and Jobs Act of 2017 favors apartment rentals over single-family home sales in a number of ways, but developers and managers should not take this advantage for granted, says designer Mary Cook.
By Mary Cook (MultiHousingNews.com Article) — In April, Americans paid their first tax bills since the Tax Cut and Jobs Act went into effect Jan. 1, 2018. It begs the obvious question for multifamily builders and developers: What do these tax code changes mean for the projects they have in the pipeline?
TCJA Spurs Multifamily
First, the good news: While the market for multifamily housing was starting to look saturated in 2017 and new deliveries slowed about 11 percent in 2018 to 287,000 units, developers are slated to complete another 319,000 new units this year. That is the largest influx of new apartments in about 30 years.
Why now? A 2018 Zillow study found that TCJA’s new standard deduction for homeowners, though actually higher, substantially reduces the number of home sales where buyers profit from the “buy vs. rent” benefit from 44 percent of home sales to 14 percent, according to Accounting Today. That helps explain why families are buying fewer single-family homes and home rental companies—from REITs to private equity—are scooping them up.
How TCJA Works
TCJA roughly doubles the standard deduction for all taxpayers to $12,000 (or $24,000 for married couples) but limits itemized deductions on homes and property taxes to the interest on up to $750,000 of mortgage debt and $10,000 in property taxes respectively. While the higher standard deduction creates more disposable income—a boost for the hospitality and retail markets that turn multifamily housing into mixed-use developments—it diminishes the incentive for growing Millennial families or downsizing Boomers to buy homes for beneficial tax deductions.
Attracting Residents Still Challenging
This encourages renters to move to bigger and/or better apartments rather than become homebuyers. And attracting residents makes the interior design of those projects—from their floor plans, fixtures, finishes and model home merchandising to their amenities and community spaces—more important than ever. To optimize results, builders and developers should pay attention to three key trends.
1. Affordability Counts In Every Demographic
Millennials, even those in high-earning careers, have postponed marriage and household formation until recently thanks to stagnant wage growth and student debt. Boomers are living longer and more expensive lives, and realizing their assets may not support their lifestyles. Tax reform is spurring these cohorts, and Generation Xers who no longer benefit from buying larger homes, to rent. Yet at the same time, costs for land in prime locations, building materials and labor are all going up.
Even though rents grew 3.3 percent in 2018 as opposed to 2.5 percent in 2017, according to the Wall Street Journal, and they are expected to rise further, affordability is critical to these generations. Builders and developers will need to focus on designing and delivering innovative projects that are not only attractive, highly functional, efficient, flexible and resilient, but also sustainable and affordable—even at the luxury level, where residents will, and already do, expect tremendous value for dollars spent.
Achieving this goal will take planning and development that starts long before projects break ground. Commercial interior designers are key to focus deliverables on resident wants and needs. They use demographics and psychographics to ideate at the front end of a project to yield effective options and avoid costly design mistakes.
2. Health & Wellness Must Be A Top Priority
Health and wellness are a double-edged sword. Builders and developers must not only focus on designing and building sustainable structures that don’t compromise residents’ well-being but also pack them with a host of features to foster healthy lifestyles and fitness.
Whether it’s the insulation, paint, finishes, adhesives, flooring, fixtures, textiles or furnishings, materials must be non-toxic and as sustainable as possible. Residences must be well-built, durable and low maintenance; free of volatile organic compounds, fungicides and biocides that off-gas and pollute indoor air; and embrace renewable, recycled, salvaged and/or local materials to conserve natural resources. Residents of all ages ask about these features and make rental decisions based on a development’s level of sustainability, which is a selling point today.
Developments must also foster a culture of wellness with amenities that go far beyond the traditional fitness center. Thanks to ever-evolving training methodologies (think Solidcore, Soul Cycle, Title Boxing and Orange Theory), builders and developers must focus on an increasingly diverse and edgy lineup of offerings—especially since fitness classes and other group training options are important selling points today. This requires them to understand their demographics, since many projects must have multi-generational appeal, and design topnotch, state-of-the-art, versatile physical spaces that can accommodate new offerings as trends change.
3. Design Must Be Optimized to Foster Connectivity & Community
Amenities wars have defined the last two years of multifamily development as builders and developers have raced to embrace the latest and greatest services and features in their projects to attract residents. Now it’s time to get strategic about this effort.
This gives new meaning to the notion of the connected renter. While high-speed access and WiFi used to be enough, now residents want to be seamlessly linked to the outside world digitally—and the communities in their buildings or developments with equal ease through personal interactions. This gives new significance to common areas, amenities and public spaces, and dictates that they be designed to strengthen the connection between residents by fostering community.
Creating community is easier said than done. It calls for analytics that incorporate psychographs to anticipate residents’ current and emerging activity needs, and requires designers to craft mutable, multi-functional spaces that encourage residents to linger longer and come more often and can handle a range of programmed activities (often at the same time). And when community spaces aren’t successful, they must be reimagined and revamped. Community must be nurtured to ensure high occupancy rates and profitability.
Mary Cook is the founder and principal of Mary Cook Associates, a full-service commercial interior design firm that focuses on the homebuilding and hospitality industries.