If There’s Upheaval In The Multifamily Sector, It’s On The Ground Floor
Despite rising economic anxiety due to the delta variant, the multifamily sector is on a historically hot streak. But while developers and landlords are having no problem filling units, the ground floor is proving to be a thorn in the side of some.
The surge in e-commerce over the course of the coronavirus pandemic and retail real estate’s corresponding struggles have combined to place pressure on how multifamily landlords use the ground floor of apartment buildings and whether those spaces are taken up by resident lobbies, retail or a combination of both, panelists at Bisnow’s Aug. 4 Philly Multifamily Update event agreed.
Ground-floor retail for the past few years has been considered an amenity in urban multifamily, be it a food and beverage use to entice the appetite or a more service-oriented retail to provide convenience. Even with the rebound in consumer spending over the past few months, finding a retailer to backfill vacated space or move into a new storefront has been virtually impossible, architecture firm SGRA principal Stuart Rosenberg said at the event.
“All these national companies and even local retailers, they're just not appearing,” Rosenberg said. “So you have this ground-floor retail space that you really can't lease anymore for retail purposes.”
One way that landlords and developers have attempted to respond to the lack of demand from tenants is to find early stage businesses or nonprofit community organizations and provide either financial or programmatic support to make the location viable, Rosenberg said. While that can have a beneficial effect in terms of activating the space and integrating a building into the community, it can no longer be considered a revenue generator.
“In the past, that [ground floor], a lot of that was considered leasable space, but a lot of that is going away,” Mosaic Development Partners co-founder and principal Greg Reaves said. “We're thinking about how we could provide the same amenities to the community at large in a way that creates vibrancy from what we hope is still leasable space. But the likelihood of that is really diminishing.”
Another use for ground-floor space that has become more common out of necessity is the receipt of packages, especially in buildings that already have a tenant lobby, panelists agreed. The spike in the volume and frequency of e-commerce deliveries over the past 18 months has overwhelmed package rooms, stressing buildings’ ability to manage both a greater frequency of delivery vehicles and a larger buildup of trash, Reaves said. Many landlords have been forced to add staff to their buildings just to manage package rooms, Rosenberg said.
“I was in Brooklyn over the weekend and half the city block where my son lives was covered in broken-down cardboard boxes,” Evolution Energy Partners Vice President Dailey Tipton said. “And they all had the Amazon [logo] on them.”
Yet disappearing revenue streams and increased logistical problems on the ground floor of apartment buildings haven’t been enough to throw cold water on what has been a breathtaking year of rent growth and occupancy, both in Philadelphia and in nearly every market in the country. Whereas the national average effective asking rent grew 8.3% year-over-year in July, according to RealPage, Morgan Properties has seen rent growth “much higher than double digits” in its portfolio, which includes 20 properties within 40 miles of Philadelphia, Morgan Properties Area Vice President Christine Beechan said.
“We predict [the market] to be strong through the end of the year, and Q1, maybe Q2, is when we’re going to see that shift again,” Beechan said. “But who knows? We hope the ride lasts a little bit longer.”