​Consultancy Encourages Taking 'One Step' Toward Transforming Neighborhoods

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585 Niagara Street, a project done by Inc Dev alumni Bernice Radle. (Buffalove Development)

​Monolithic capital stacks are quaking; REITs are reshuffling; an economic downturn is looming. But amid a flurry of harbingers in the commercial real estate industry, one grassroots consultancy says it’s time for you — yes, you — to step up.

Or not even necessarily “up.”

“Take one small step off the curb” is the message from Incremental Development Alliance (Inc Dev), a national not-for-profit group of developers that wants to help anyone getting started in real estate.

STEP, among the group, is an acronym for buildings that are small-scale, time-enhanced, entrepreneurial and purposeful. In a November workshop hosted by The Hopewell Downtown Partnership (HDP) in Virginia, mentors Ryan Terry and Richard Price championed the idea that everyday citizens who care about their communities are best suited to creating wealth and transforming their own neighborhoods one project (and one step) at a time.

The First Step

The key to this method is to first identify what’s missing in your local community. If you notice gaps in housing, retail, workplaces or services in your daily life, consider them opportunities. A corner store here, a duplex there; “these are the puzzle pieces that investors neglect,” Price said.

Large developers nowadays are seeking returns from large single-family home developments and massive, high-end multifamily complexes, Price said. “But guess what? Most people don’t want to see a lot more of either.” Your advantage over large-scale developers is that you know what types of places actually enhance daily life in your community, he said. “You have skin in the game.”

After spotting some opportunities to add value in a market, try to confirm your observations. Economic groups like HDP conduct studies on a given area’s fundamentals and should be sourced for data, Price said. “You really start by trying to understand the basic stuff about your market … like the existing rents and sale prices, and what buyers and renters are looking for.”

A rudimentary grasp on the market will help crystalize what type of project makes sense for a given location. But more importantly, Price stressed, is to ask what makes sense for you. To do this, consider a couple of factors.

“Do you own or have access to property of any size or kind?” Terry asked. “I don't care if it's 10 square feet on a street corner in the middle of nowhere, or if it's your own house. Is it worth considering it as a potential project?”
Alternatively, do you own a business? “If you rent a commercial space, the next logical step is to consider a project that would also allow you to own the real estate that your business sits in.”

Knowing someone who owns property can go a long way, too. “A lot of times they inherited it, but don't really know what to do with it, so it just sort of sits there,” Terry continued. “You show up with some cool ideas and figures and all of the sudden, you’ve got a partner.”

Having property available is key. If you don’t own the land or have it under contract, “you’re at a high risk of wasting your time,” Price stressed. “I would strongly encourage you to focus first on getting a piece of land under contract and then figuring out what makes sense for that project — not the other way around.”

Price started with his own house. “Renovating the basement [into a rental unit] gave me the confidence and a certain amount of savvy to start to understand what the residential real estate market was about in Charlottesville, and how to be a landlord,” he said.

The Money Part

By this point you’ll have discovered your “why,” Terry pointed out. “You have to understand what you want out of this. You may want to do one purposeful project, maintain a side-hustle or you may want development to be your new full-time job.”

From there, an entrepreneurial real estate developer just needs a few more ingredients, according to the mentors: some people to help reinforce goals, whether that’s through investment, promotion or moral support; enough hustle and willingness to not quit when it inevitably gets hard; and, of course, some money — whether that’s yours or someone else’s.

“The second step to becoming a developer is the money part,” Price said. “But don’t be scared,” he urged. “I really need to emphasize that real estate finance does not need to be complicated.”

"Basically, if you can add and subtract, you can do a pro forma. And if you can do a pro forma, you can be a developer." - Richard Price

Start with a pro forma, he said. “If you haven’t heard that term before, it’s basically just a score sheet for real estate development where you keep track of expenses and potential revenue. It answers the fundamental question of ‘how am I going to make money on a project like this?’”

Get figures on “soft costs” in your area — things like how much designers charge, how much it costs to get a project approved by the municipality, and what to expect in legal fees. For “hard costs,” gather data on the price of materials and how much builders charge for similar projects.

The pro forma will be a living document, Price continued. “You never get it right the first time; it's something to keep going back to and working on.” Luckily, he said, there are plenty of resources available to help create a pro forma for any type of project.

But more important than how to get money from a project, is how to get money for a project. Both Terry and Price said they began developing with modest resources. “I had to borrow money from a bank,” Price said. “Then I went and raised a little bit of money here and there from people we knew.”

Personal connections in the financial services industry can certainly help, Price said, but even without that, presenting solid fundamentals supported by a plan and passion should make it possible to land a loan. A community development financial institution (CDFI) in your area is also a good starting point, Inc Dev executive director Sherry Early chimed in. “CDFIs have less rigorous underwriting restrictions and they also have patient capital.”

“It’s very difficult to do things in this business with bad credit and no cash,” Terry said. “But I’m here to tell you that all sorts of people have done it.” Early said she started with personal savings for her first project in Gary, Indiana, then found it increasingly easier to go through due diligence processes with banks and get loans on subsequent projects.

​Entrepreneur Bernice Radle's 585 Niagara Street project. (Buffalove Development)

​The concept of “other people’s money” is crucial for real estate entrepreneurism, Terry said. Small projects — especially first projects, almost always start with one or two types of partners.

Friends and family are a common source of seed money, but it all depends on who you know. Some people may be willing to contribute, but expect too high of returns, Terry said. “But if it’s someone who is otherwise getting 6% from a mutual fund and you can promise them 8%, you’re looking pretty good.”
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Most professional investors are looking for evidence of stable cash flow or a high return that reflects the risk they’re taking. “But on a first project, you have neither,” Terry said. “You’re high risk and not very potentially high reward,” and you have no long-term cash flow to show. “That’s why friends and family are your best bet.”

The other type of partner is someone who can contribute property or “sweat equity," Price said; maybe they are willing to put in labor on renovations or even a contractor who contributes their skills and expertise.

The developers recommended steering away from owner-financing for a first project, though. When the owner of a property sells you their property on interest, “typically it’s going to be more risky and more expensive to you as a borrower,” Terry explained. “The rates can be double or triple over prime. If you miss a payment and you’re late, they take that property right back and you’ve lost a lot of money.”

Instead, seek out the “most vanilla form of financing possible” for your first project, he continued. “You’re going to make so many mistakes on your first project anyway. Don’t put yourself in a position where that mistake might be fatal.”

Size Matters

After observing the market, making sense of simple finances and seeking out some capital from friends, family, partners or a bank, Price said, it’s important to “right-size” your project. By that he means that “bigger isn't necessarily better.”
The smaller the project, the more straightforward it is to develop, Price said. As you add space, the seesaw between costs and profits becomes harder to balance.

“If you’re building a one-story building, it’s basically a simple box,” he continued. “No stairs, no elevator and minimal amounts of mechanical space. Just about every foot you build is rentable.” As you add size, you add complexity, he said. Costs per square foot go up, which means that the rents or sale prices required to achieve returns also go up.

“If you start to get into really large-scale development, code requirements change,” Price elaborated. Fire protection requirements, for example, get more stringent. “You start to devote space to nonproductive uses. If you're building stairs, elevators, hallways, mechanical spaces and structured parking, that’s square footage you can’t get revenue from.”

Your very first project is likely going to be really modest in scale, Terry said. “It’s likely going to be a renovation — and I’m not talking gutting a building, I’m talking about things like fixing a roof and painting. Maybe you rent it out, but maybe you have to sell it to establish a nest egg for your next project. If you’re starting with $0, like a lot of us do, you’ve got to start small.”

Real Estate Development Is Like Farming

But this isn’t about flipping buildings and making a quick buck, Price cautioned. “You're focusing on the long-term rewards of the project. You're helping build rich soil to nurture a place that can grow and help you with your endeavors as you're going forward. We call this ‘finding your farm.’”
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One successful project tends to lead to the next, Price continued. “As you start to do more projects, it starts to improve your neighborhood. The neighborhood starts to offer more opportunities, and suddenly you’re on a roll and instead of asking the questions, you're the person who’s answering questions for other people.

Small-scale development tends to build stronger, more sustainable neighborhoods because the projects are typically flexible, Price said. “They're time-enhanced, meaning the buildings are designed to grow and adapt,” he continued. “What made sense 10 years ago may not make sense now, but with small, flexible buildings, it’s easy to convert them into something new.”

​'Middle housing' example Eleven: 30 condominiums in Charlottesville, Virginia. (Courtesy of Richard Price)

​Price’s “farm,” the automobile-centric east side of Charlottesville, Virginia, “had been beaten up by many years of disinvestment,” he said. “It was not a vibrant neighborhood, but I saw a lot of potential; I looked around and said ‘wow, these are nice old buildings.’ There's some great natural features and it’s walking distance to downtown. I was one of those people who said, ‘what can I do here?’ And I started doing.”
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First it was a six-unit residential infill project that included mixed-use income, Price said. Then an old factory building converted to offices, restaurants and a bakery. Next some townhouses built on an old railroad yard. “Now I’m one of several developers working in this neighborhood and our collective efforts over time have started to transform this forgotten neighborhood into a place that's now in demand.”

Ideas for First Commercial Real Estate ProjectsBuildings aren’t even necessary for incremental real estate development, though. The basic building block of urbanism is about bringing people together, Price said. Businesses like farmers’ markets, street fairs and food truck courts are ones you can start partnering with, possibly by hosting them on vacant land, before helping them graduate to brick-and-mortar spaces.

Pop-ups and short-term rentals are also good first steps. “Bring someone from a tent into a more permanent solution,” Price said. “One of my colleagues bought an old industrial building and filled it with a bunch of desks, which he rents out as a coworking studio.”

“Liner buildings” are another good option. This is a term for very small shops positioned on a street front to mask parking or other unsightly structures behind them, with facades that meet a city’s design approvals.

Live-work housing, with a retail component on the first floor and apartments on the second, can also be a great first project that provides two sources of income.

Examples of first projects from Inc Dev mentors and mentees run the gamut. Monte Anderson, for instance, bought a long-vacant property on the “wrong side of the tracks” of South Dallas and converted it into an incubator space for young entrepreneurs called Grow DeSoto Marketplace, Terry said. “He chopped a grocery store up into a bunch of 300- to 500-square-foot spaces and the rest is shared facilities and common space.”
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Part of Anderson’s model includes business mentorship, or basically the “Lord’s work,” Terry joked. “But what he has found is that because these spaces are so small, they are both profitable for him on a per square foot basis, at say $400 per month, but they’re also affordable to the tenants — the youngest of whom is a twelve-year-old who was since able to get a loan from the bank to operate his snow cone business.”

Going-in costs can be low with old buildings, he continued, but end up being cash-flow positive with careful management, Terry continued. Alissa Shelton bought an old bank in a Detroit suburb and turned it into a community incubator space called Bank Suey.

​Bank Suey, a community space in Hamtramck, Michigan. (Bank Suey)

​Others have renovated commercial spaces into middle housing, a term used for duplexes, fourplexes, cottage courts and small multiplexes that sometimes have a commercial component integrated or nearby. It’s a type of project Terry often finds himself gravitating toward.

Jenifer Acosta bought an old building with “terrible 1950s cladding that had beautiful brick underneath,” Terry said. “She renovated it and turned it into a commercial use downstairs and loft apartments upstairs.”
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Look at every building’s potential, he continued. Bernice Radle saw a “really plain commercial building — just a big, brick box, really — and rehabbed it into apartments on the upper floor with commercial uses downstairs. She put a cool mural on it [with the help of an established artist as well as volunteers] and got some cool tenants in there, and it’s a great cash-flow project.”

In This Economy?

With interest rates and inflation rising, even the biggest institutional players are currently balking on real estate projects, the developers concluded. “This model is not going to save you from all the other stuff that's going on in your economy, okay?” Terry said. “This is not a panacea.”

But you, as an individual, “likely have a burning reason why you want to do this,” Terry continued. “You have to have your heart in it, because if you don’t, you’ll quit.”
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Wealth creation is likely a big reason, but one that won’t set you apart from large-scale developers. “It’s not that we’re out here doing this for charity,” Price said. “We all need to earn a living and hopefully build wealth over the long term. But for me, there’s nothing more gratifying than having the people in this neighborhood walk up to me and say, ‘that's a great project. We’d love to see more of that kind of project here in town.’”

Daniel Parolek inspired a new movement for housing choice in 2010 when he coined the term  “Missing Middle Housing,” a transformative concept that highlights a time-proven and beloved way to provide more housing and more housing choices in sustainable, walkable places.

Missing Middle Housing:
House-scale buildings
with multiple units
in walkable neighborhoods
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These building types, such as duplexes, fourplexes, cottage courts, and courtyard buildings, provide diverse housing options and support locally-serving retail and public transportation options. We call them “Missing” because they have typically been illegal to build since the mid-1940s and “Middle” because they sit in the middle of a spectrum between detached single-family homes and mid-rise to high-rise apartment buildings, in terms of form and scale, as well as number of units and often, affordability. In the diagram below, the Missing Middle types are shown in yellow, providing many housing options in between the single-family homes and higher intensity apartment buildings, both shown in white.

​If there’s one thing Americans love, it’s choices: what to eat, where to work, who to vote for. But when it comes where we live or how to get around, our choices can be limited. Many people of all ages would like to live in vibrant neighborhoods, downtowns, and Main Streets—places where jobs and shops lie within walking distance—but right now those places are in short supply. Missing Middle Housing provides more housing choices. And when we have more choices, we create living, thriving neighborhoods for people and businesses.

— Lynn Richards, President and CEO of the Congress for the New Urbanism

What does the market want?

• Walkable and Accessible Amenities
• Variety of Transportation
• Affordability
• Sense of Community

Demand for Housing Choice

A greater variety of household sizes and demographics require a greater variety of housing choices. 

Young, highly educated, technology-driven millennials desire mobile, walkable lifestyles. They are willing to exchange space for shorter commutes, mixed-use neighborhoods, and shared open spaces that foster community interaction. 

At the same time, baby boomers are working and living longer.  They want to stay mobile and active in their later years, but they won’t drive forever and don’t want to be dependent on their family members to get around. They also want to find ways to stay in their community without having to care for a large home and yard.

Multigenerational homes have increased by 17% since 1940, and that number continues to rise. The growing senior population, more families with multiple working parents, diverse family cultures, and an increased desire to live in intergenerational neighborhoods all contribute to the growing demand for multigenerational and even multi-family households. Affluent seniors seek to downsize from their large suburban homes to more convenient, easy-to-care-for townhouses, apartments, or condos, while others need quality, affordable housing that won’t break their limited budget. Many retirees would like to move close to, but not live with, their children and grandchildren.

The growing demand for a walkable lifestyle has the potential to transform sprawling suburbs into walkable communities.

90% of available housing in the U.S. is located in a conventional neighborhood of single-family homes, adding up to a 35 million unit housing shortage. Source: Dr. Arthur C. Nelson, “Missing Middle: Demand and Benefits,” Utah Land Use Institute conference, October 21, 2014.

Walkable and Accessible Amenities

This country is in the middle of a structural shift toward a walkable urban way of living. After 60 years of almost exclusively building a drivable suburban way of life … the consumer is now demanding the other alternative,” wrote Christopher Leinberger in the New York Times article “Car-Free in America? Bottom Line: It’s Cheaper.”

By 2025, up to 85% of households will be childless as millennials choose to marry later and have fewer children and the number of empty nester households continues to grow.

Housing trends show singles demand more amenities, and women and older persons who live alone generally seek housing options that offer better security. They also drive less, reducing the need for off-street parking in private garages or lots, and increasing the need for accessible public transportation.

The present economic research finds that business wants talent, but talent wants place—so more businesses are relocating to places. When drilled further the research finds Missing Middle Housing is the fastest growing preference because it has the ‘place’ quality talent seeks. Hence development of Missing Middle is now recognized as a housing AND economic development strategy.

— James Tischler, Michigan State Housing Development Authority

The National Association of Realtors, state that, walkability is fast becoming one of the most important factors in choosing where to live. People want of all ages want easy access to amenities such as stores, businesses, cultural center, and transit.Homebuyers are seeking locations within walking distance to shopping, cultural amenities, jobs, and open space and the value of homes in these types of neighborhoods has increased at a much faster pace than homes in driveable suburban neighborhoods. “In a scenario where two houses are nearly identical, the one with a five-foot-wide sidewalk and two street tress not only sells for up to $34,000 more, but it also sells in less time,” wrote J. Cortright, in CEOs for Cities’ Walking the Walk: How Walkability Raises Home Values in U.S. Cities.­­ 

But, as the chart at the right shows, now you don’t have to live in a dense urban center to live a walkable lifestyle. Some 70% of upcoming, walkable places in Washington D.C. are quaint neighborhoods located outside of the urban core.

Variety of TransportationAccessibility to useful multimodal transit—public transportation, bike friendly streets, and car share—is needed by baby boomers and desired by millennials. But there is an economic argument, too.
“American families who are car-dependent spent 25% of their household income on their fleet of cars, compared to just 9% for transportation for those who live in walkable urban places,” says Leinberger.

Walkable neighborhoods are now a top priority for seniors, along with access to transportation, and connectivity. Source: What’s Next? Real Estate in the New Economy, Urban Land Institute, 2011; Transportation for America.

The same is true for bike friendly cities. According to the Livable Street Alliance, as reported on the AARP Livability Fact Sheet, the average American household spends more than $8,000 a year on cars while the cost to maintain a bicycle is only about $300 per year. These savings, which could amount into the billions if trends were widely adopted, could be reinvested into transit-oriented development and infrastructure, education, and health care.

Cities and property owners benefit from less car dependent zoning too. “An off-street parking space costs between $3,000 and $27,000 to build, and about $500 a year to maintain and manage. On-street parking is more efficient and can bring in as much as $300,000 per space in annual revenues,” writes Prof. Donald Shoup, in Instead of Free Parking.

An increasing number of Americans spend close to 30% of their income on housing while transportation costs can consume an additional 20% or more of household income. Source: What’s Next? Real Estate in the New Economy, Urban Land Institute, 2011.

AffordabilityHousing affordability is a primary concern for many Americans across the country ranging from blue-collar workers to early-career singles, young families and seniors. There is an increasing segment of the population that spends more than 30% of their income on housing, reducing their purchasing power for other amenities (Source: What’s Next? Real Estate in the New Economy, Urban Land Institute, 2011).

Smaller homes and apartments cost less to rent or purchase and maintain, while urban neighborhoods provide services and amenities within walking distance as well as a variety of affordable transportation options.
Cities and towns that want to retain or attract these household types need to focus on providing diverse, affordable housing options near jobs, schools, and other amenities within walkable communities. In addition, suburbs that want to retain their aging populations and attract newer, younger families, will need to create new, walkable urban environments and encourage the construction fo Missing Middle Housing through rezoning and by providing public transportation options.

Sense of Community

More and more, Americans say living in a diverse community that includes people at all stages of life is an important factor in determining where to live.
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Seniors want to live near family and friends, but not with them. Missing Middle building types allow people to stay in their community thoroughout their lives because of the variety of sizes available and an increased accessibility to services and amenities.

Almost 49% of Americans are living in a multigenerational household. Source: Pew Research Center analysis of U.S. Decennial Census and American Community Surveys.

According to Chris Leinberger in his article “The Next Slum?” for The Atlantic, elements that used to draw families into the suburbs—better schools and safer communities—are now becoming the norm in cities, while these elements could worsen in suburbs that are dependent on home values and new development.
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Housing market projections suggest that construction in the near future will accelerate only moderately for single-family housing but will greatly increase for multifamily housing (Source: Jordan Rappaport, “The Demographic Shift From Single-Family to Multifamily Housing,” Economic Review, Kansas City: Federal Reserve Bank of Kansas City, 2013). Implemented in both urban and rural contexts, Missing Middle Housing allows people to stay in their community during different stages of life because of the wide variety of sizes, housing levels, and accessibility it provides.

​What are the characteristics of Missing Middle Housing?

Missing Middle Housing is not a new type of building. It is a range of house-scale building types that exist in cities and towns across the country and were a fundamental part of pre-1940s neighborhoods. They are most likely present on some of your favorite city blocks—you may even have them in your own neighborhood.

When a variety of Missing Middle building types are combined in a neighborhood (and usually with detached single-family homes), this helps to provide enough households within walking distance to support local businesses and public transit. On closer look, Missing Middle types are found within many of the most in-demand communities in places like Denver, Cincinnati, Austin and San Francisco.

So what do Missing Middle building types have in common?

• Walkable Context
• Small-Footprint Buildings
• Lower Perceived Density
• Smaller, Well-Designed Units
• Fewer Off-street Parking Spaces
• Simple Construction
• Creates Community
• Marketable

Walkable Context

​Missing Middle housing types are best located in a walkable context. Buyers and renters of these housing types are often trading space (housing and yard square footage) for place (proximity to services and amenities).
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The images below from Austin, TX, show the difference between walkable and non-walkable environments. On the left is the walkable urban neighborhood of Bouldin Creek, where the well-connected street grid and development pattern make walking and biking convenient and support robust public transit. On the right is the neighborhood of Northwest Hills, less walkable and more auto-oriented in character.

Walkable context (left); Auto-oriented context (right); Austin, TX
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​A walkable context means not just pedestrian facilities such as sidewalks and protected crossings, but also destinations to walk to. The map below from Greenville, SC shows an analysis of parcels that are truly “walkable”, and fall within a 10-minute walking distance of “centers” that provide services, shopping and transit.

Walkable neighborhood analysis; Greenville, SC
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Small-Footprint Buildings
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These housing types typically have small- to medium-sized footprints, with a body width, depth and height no larger than a detached single-family home. This allows a range of Missing Middle types—with varying densities but compatible forms—to be blended into a neighborhood, encouraging a mix of socioeconomic households and making these types a good tool for compatible infill.

Lower Perceived Density​
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Due to the small footprint of the building types and the fact that they are usually mixed with a variety of building types even on an individual block, the perceived density of these types is usually quite low—they do not look like dense buildings. But one of the primary benefits of Missing Middle Housing is that it helps provide the number of households needed for transit and neighborhood-serving local businesses to be viable (typically about 16 dwelling units per acre). As shown below, a block with only single-family homes (left) generates low densities that do not support nearby amenities or transit. When Missing Middle Housing is thoughtfully integrated (right), it increases the population density to the threshold required to support neighborhood commercial amenities and transit.

​Smaller, Well-Designed Units

​Missing Middle housing types have smaller units. The challenge is to create small spaces that are well designed, comfortable, and usable. The ultimate unit size will depend on the context, but smaller-sized units can help developers keep their costs down and attract a different market of buyers and renters who are not being provided for in all markets. Smaller, well-designed units are very attractive to the 30 percent of US households that are single-person household, baby boomers that want to downsize, and other households choosing to live small for environmental reasons. Since Missing Middle types work well for both for-sale and rental housing, this further increases their appeal as more and more people nowadays are choosing to rent for longer or even permanently, over home ownership.

Fewer Off-street Parking Spaces

Because they are built in walkable neighborhoods with proximity to transportation options and commercial amenities, Missing Middle housing types do not need the same amount of parking as suburban housing. We typically recommend no more than one parking spot per unit, and preferably less. In fact, requiring more than one parking space per unit can make Missing Middle types infeasible to build. For example, if your zoning code requires two parking spaces per unit, a fourplex would require eight parking spaces, which would never fit on a typical residential lot. In addition, providing that much off-street parking for each fourplex would create a neighborhood of [remove ‘small’] parking lots rather than the desired neighborhood of homes. Less parking means more households on the same amount of land, increasing the viability of transit and local businesses. The cost of providing parking also has a tremendous impact on overall feasibility of development, and housing affordability, as illustrated by the table below.

Simple Construction​
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Missing Middle Housing is simply constructed (wood-frame/Type V), which makes it a very attractive alternative for developers to achieve good densities without the added financing challenges and risk of more complex construction types. This aspect can also increase affordability when units are sold or rented. As providing single family detached sub-$200,000 starter homes is becoming increasingly out of reach for builders across the country, Missing Middle Housing can provide an attractive and affordable alternative starter home.

Creates Community​

Missing Middle Housing creates community through the integration of shared community spaces within the building type (e.g. cottage court), or simply from being located within a vibrant neighborhood with places to eat, drink, and socialize. This is an important aspect in particular considering the growing market of single-person households (nearly 30% of all households) that want to be part of a community.
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Missing Middle housing helps to create a shared sense of community, as seen in the example below from Conover Commons, Redmond, WA. Source: The Cottage Company.

Marketable​

Because of the increasing demand from baby boomers and millennials, as well as shifting household demographics, the market is demanding more vibrant, sustainable, walkable places to live. These Missing Middle housing types respond directly to this demand. In addition, the scale of these housing types makes them more attractive to many buyers who want to live in a walkable neighborhood, but may not want to live in a large condominium or apartment building.
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The graphs below highlight the shifting demand for walkable living and Missing Middle Housing.

​If there is land for beautifully-designed homes that fill a gap between stand-alone houses and mid-rise apartments, the smart thing to do is to fill it with housing types we’ve been missing in our market for so long.

— Heather Hood, Deputy Director, Northern California, Enterprise Community Partners

How does Missing Middle Housing integrate into blocks?

Missing Middle Housing types typically have a footprint not larger than a large detached single-family home, making it easy to integrate them into existing neighborhoods, and serve as a way for the neighborhood to transition to higher-density and main street contexts. There are a number of ways in which this can be accomplished:

• Distributed throughout a block
• Placed on the end-grain of a block
• Transitioning to a commercial corridor
• Transitioning to higher-density housing

Distributed throughout a block

Missing Middle Housing types are spread throughout the block and stand side-by-side with detached single-family homes. This blended pattern of detached single-family homes and Missing Middle Housing types, with densities up to 40 dwelling units per acre, works well because the forms of these types are never larger than a large house.
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Placed on the end-grain of a block

Missing Middle Housing types are placed on the end-grain of a block with detached single-family homes, facing the primary street, which is often a slightly busier corridor than the streets to which the detached single-family homes are oriented. The most common condition is to have several fourplex units on the end grain lots facing the primary street. This configuration is usually located on the end grain of several continuous blocks adjacent to a neighborhood main street, which increases the blended density to achieve the 16 dwelling units/acre necessary to support small, locally-serving commercial and service amenities, and transit.
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This configuration allows for the use of slightly larger buildings because the Missing Middle housing types are not sitting next to detached single-family homes. In this block type, the alley to the rear of the lots also allows for a good transition in scale to the detached single-family home lots behind them. Often you will see a similar block configuration with one or two fourplexes on the corners of the end grain lots on the block.

Transitioning to a commercial corridor​
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Missing Middle Housing is excellent to transition from a neighborhood to a Main Street with commercial and mixed-use buildings. These types are generally more tolerant and better able to effectively mitigate any potential conflicts related to the proximity to commercial/retail buildings or parking lots behind commercial buildings.

​Transitioning to higher-density housing

Smaller-scale Missing Middle Housing types are placed on a few of the lots that transition from the side street to the primary street, providing a transition in scale to the larger buildings on the end grain of the block along the primary street.

For us, mixing housing types is important in today’s market. Buyers want choices, the investors and lenders want more flexibility in the projects, and planning officials expect a more thoughtful integration into the existing neighborhoods. The mixing of product provides a diverse community, enhances value, and it helps create the type of place our buyers are looking for today.

— David Leazenby, Onyx+East

What’s the best way to enable Missing Middle Housing?

(Hint: Conventional Zoning Doesn’t Work)

Problems with Conventional Zoning by Land UseConventional (Euclidean) zoning regulates primarily by land use, dividing neighborhoods into single-family residential, multifamily residential, commercial, office, etc. This separation of uses creates the opposite of mixed-use walkable neighborhoods. Along with use, conventional zones typically rely on numeric values, such as floor area ratio (FAR) and density, which results in unpredictability and creates all sorts of barriers to Missing Middle Housing.

Missing Middle Housing (MMH) are multi-unit, house-scale buildings intended to be part of low-rise residential neighborhoods. However, these types of neighborhoods are often zoned as single-family residential disallowing multi-family buildings, thus preventing Missing Middle types from being built. Yet, there are numerous examples across the U.S. where, for example, a house-scale fourplex fits in nicely with single-family detached houses. Why? Because it’s the same size and footprint as a typical single-family home.

Conventional zoning creates multifamily zones that typically allow much bigger buildings – both taller and wider – than Missing Middle types. This also encourages lot aggregation, often leading to large suburban garden apartment buildings. The end can be an awkward juxtaposition of these very different residential environments, often with abrupt transitions in form and scale. Missing Middle types can successfully bridge these two environments, if allowed.
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Conventional zoning codes often fail to regulate building size and form in proportion to lot sizes, that can lead to awkward relationships between neighboring properties. Form-based standards avoid such incompatibility by regulating building forms, massing and transitions.

​Zoning by Density

Another reality that we’ve found is that most communities regulate housing projects with the residential density tool. In addition to this tool not being clear about what form the buildings might take, density-based zoning doesn’t work with the “blended densities” found in neighborhoods where Missing Middle Housing (MMH) thrives. MMH buildings are similar in form and scale to detached single-family homes. But because they include from 2 to 12 units on a lot, MMH buildings often vary dramatically in their densities compared to houses. This makes it either illegal to build them in many zones, and complicated to regulate with a density-based system.

For example, consider a cottage court that can have net densities from 14 to 21 units per acre (or more with alley-loaded lots), even though the buildings are only one story tall, and each cottage is only 25 feet by 30 feet (slightly bigger than a 2-car garage). This low-intensity, house-scale multi-family type is an excellent way of adding housing while blending in with single-family homes. However, this type would not be allowed in many conventional single-family residential zones (since it has multiple units) and may also not be allowed in conventional multi-family zones that operates on density standards.

For instance, if a multi-family zone allows a maximum density of 35 dwelling units per acre with few form standards, builders/developers will tend to max out the lot with a large, out-of-scale apartment building, rather than building the cottage court that the neighborhood would prefer. This is because, typically, an investor will tend to use every allowed unit and not leave money on the table. It’s just common sense and human nature.

Another issue with density-based zoning is that tends to treat all units the same regardless of size. This means that a 3,500-square-foot unit is considered the same as a 600-square-foot unit for calculations such as density, parking and open space. The lack of recognizing these differences in size discourages much-needed, smaller units. For example, using conventional zoning, a fourplex with four, 600 sf units would require four times the parking and open space as a 2,400 sf detached single-family home, even though the amount of building area is the same. This presents confusion and barriers, typically making the fourplex unfeasible to fit on a typical lot.

Barriers to Missing Middle Housing from Conventional Zoning

Conventional or Euclidean zoning has inadvertently created a number of barriers to enable the design and delivery of Missing Middle Housing. Some of the key issues are:

• Lack of zoning districts and development standards that allow and enable the full range of Missing Middle types. Many jurisdictions jump from single-family residential zones (that may allow duplexes in addition to single-family homes) to multi-family residential zones that have standards geared towards delivering larger, more intense building types on bigger lots. In such zones, small-scale multi-unit buildings are often made physically or economically infeasible due to maximum densities, minimum lot sizes, setback, lot coverage and high parking requirements, among others.
• Ineffective mapping of zones. Most American cities have the vast majority of residential land, up to 75 percent in many cases, mapped for single-family zoning. This precludes Missing Middle types from being built in large portions of the community, including many walkable neighborhoods that would be perfect locations to add diverse housing types without requiring excessive parking.
• Density-based zoning discourages smaller units. A system based on allowed densities and minimum unit sizes inherently discourages developers from creating residential products in a range of sizes, and leads to the largest units that the market will accept. This skews the market towards more expensive, high-end units and adversely impacts housing attainability; and also reduce the available options for many demographic groups that are looking to downsize, or live in smaller units.
• The challenge of parking requirements. Off-street parking requirements have a tremendous impact on small-scale residential infill. On most small lots, Missing Middle types work well when parking requirements are reasonable (1 per unit or less). However, when parking requirements are higher, this reduces the developable area, and thereby the economic viability of Missing Middle types.
• Impact fees make multi-unit projects economically infeasible. Municipalities charge developers impact fees to finance new or expanded public facilities and services. In many cases, the impact fees is tied to the number of units, not unit size. In other words, a 5,000 sf home and a 500 sf home may be charged the same impact fee. This is a disincentive for developers to construct small-scale, multi-unit buildings and encourages building units as large as the market would support, since higher sales prices would help mitigate the impact fee for that project. This is a key reason obstructing the natural production of smaller, affordable housing by private developers.

The Alternative: Form-Based Coding

Form-Based Coding is a proven alternative to conventional zoning that effectively regulates Missing Middle Housing. Form-Based Codes (FBCs) remove barriers and incentivize Missing Middle Housing in appropriate locations in a community.
FBCs represent a paradigm shift in the way that we regulate the built environment, using physical form rather than a separation of uses as the organizing principal, to create predictable, built results and a high-quality public realm.

The Form-Based Approach to Regulating Missing Middle HousingThe form-based approach starts with a Community Character Analysis of the community’s existing patterns of development and built form, climate, and other considerations. Looking at the existing patterns and desired future built form, a range of form-based zones are created. For each form-based zone, a specific range of housing types are allowed, that would allow the neighborhood or community to evolve while ensuring compatibility with existing buildings. For example, in a walkable residential neighborhood, allowed building types may include single-family detached homes, cottage courts, and side-by-side duplexes. In a more urban walkable neighborhood, cottage courts, side-by-side duplexes, stacked duplexes, fourplexes, and small multiplexes may be allowed.
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In addition, for each building type, a Form-Based Code typically provides supplemental form standards that are calibrated to ensure good urbanism and prevent overbuilding in terms of height and bulk. For example, a cottage court typically allows for 6 to 8 units, but also specifies form standards such as a maximum height of 1 to 1.5 stories, a maximum building footprint/unit size of around 800 square feet and a minimum size for the shared courtyard or green space.

​Regulating with building types and this fine-grained approach allows for more predictable built outcomes. For instance, on a 100′ by 100′ lot, an FBC can allow two fourplexes, or a cottage court with eight small, one-story units; but not a single, larger eight-unit apartment building.

For these reasons and more, Form-Based Coding is the most effective way to enable Missing Middle Housing.
“I want to thank you for your great work on Missing Middle Housing! It has been useful in my current research on policy reforms to support more affordable infill development in Victoria, B.C., and informing my report ‘Affordable Accessible Housing in a Dynamic City.’

— Todd Litman, Victoria Transport Policy Institute

More information about Form-Based Codes, see:

• Form-Based Codes: A Guide to Planners, Urban Designers, Municipalities, and Developers,
  by Daniel Parolek, Karen Parolek, and Paul C. Crawford
• Form-Based Codes Institute

Form-Based Codes with Building Types to Reference:

• Cincinnati, OH (And read this blog post about the project)
• Mesa, AZ (Article 6: Form-Based Code)
• Livermore, CA

​It’s no secret that many markets across the country have serious shortages of housing for their workforce populations.  
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“Most cities and regions have fallen behind on housing delivery,” observed Daniel Parolek, architect, urban designer and author of Missing Middle Housing: Thinking Big and Building Small to Respond to Today’s Housing Crisis (2020).  

impacts those who want to buy homes rather than rent too, notes Nicholas Julian, senior program manager for land use at the National Association of Home Builders. “A staggering 96.5 million households, or roughly 73 percent of all U.S. households, cannot afford a new home at (the current $425,786) median price point,” Julian remarked.
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Julian and Parolek agree that adding missing middle housing to our nation’s stock can help ease the shortage. “These are homes that are more attainable for valuable members of your community including teachers, nurses and firemen,” Julian suggested. “Missing middle housing units, like duplexes and townhouses, may be what is attainable as ‘starter housing’ for folks entering homeownership for the first time these days.” 

These dwellings can also suit college students, young renters, seniors and young condo buyers. “There are many families who are doubling up in households or with roommates due to affordability,” commented Jessica Lautz, deputy chief economist for the National Association of Realtors. “More affordable solutions may allow young adults to leave the nest or roommates to have household formation independently.” 

Defining missing middle

Missing middle has two meanings: The first is Parolek’s, which is housing that bridges the functional gap between detached single-family homes and mid-rise complexes. It’s the duplex to fourplex, townhouse and courtyard apartment, compact live/work spaces and right-sized buildings that fit architecturally into low-rise neighborhoods with detached single-family homes.

It’s also defined as housing in the middle of the price range, between subsidized affordable units for those at or below the poverty level and luxury units for the affluent. There’s a sweet spot where these two definitions converge that millions of would-be tenants and homeowners that serve us all in our cities’ commerce and civic workforce compete to live in.

Enhancing livability

The goal is creating missing middle projects that enhance livability. They tend to fit well into walkable neighborhoods with coffee shops, restaurants and small markets safely accessible on foot. Pocket playgrounds every quarter mile and conveniently located co-working spaces make these communities appealing to many prospective residents, the architect notes, and potentially engender less development opposition from established neighborhoods.

“In our world, where NIMBYs are everywhere and they push hard against any non-single-family projects, the size, scale, and typology of these ‘house scale’ buildings support an easier path to rally community support, especially those that are predominantly single-family home communities,” Parolek remarked.   

David Spence, CEO of Dallas-based Good Space, renovates missing middle rentals in one of the city’s emerging neighborhoods. Spence attributes the success of his missing projects, including one that became a case study for Parolek’s book, to an emphasis on quality and detail.

“We’ve always spent beyond the market on renovations, and it has always worked out in the end in the form of sufficient rents and potential [building] sales prices,” he shared. “We squeeze in a ‘full appliance package’ (e.g., washer/dryer, central HVAC, microwave, vent hood, etc.), but parking is scarce, usually uncovered, and sometimes curbside. There’s no fitness center, no palatial bathrooms, no dog park.” 

But the firm provides quality in other ways through restoration of old fixtures and finishes, a sense of community, lively color schemes. Since these features don’t cost as much as much as a swimming pool and jacuzzi, Good Space is able to control their basis.  

Missing middle demographics

Parolek sees missing middle housing especially appealing to single- female households, an often overlooked segment, he finds. “Keep in mind that 30 percent of most markets are single-person households,” explained. “A well-designed small unit with higher-quality finishes is ideally what they want. They also like the built-in sense of community and security.”

Downsizing Baby Boomers are another good market, he points out. “They are looking for walkability to amenities, a sense of community, and the ability to lock off the unit and travel without having to worry about maintenance,” he explained, noting AARP has included missing middle housing in its Livable Communities Initiative.  

Another niche Parolek identifies is the household seeking a car-free lifestyle. Walkability and easy transit access is key for these prospects. Opticos-designed Culdesac Tempe,  a 650-unit Arizona master-planned community. “It will be the largest car-free community in the United States when completed,” he commented.

Last, but definitely not least, is the multi-generational opportunity, where grandparents can live close to their adult children’s families while having their own place in the same community. “Missing middle has historically provided great opportunities to deliver multi-generational housing and will also do so in the future,” Parolek predicted. He sees that encompassing different housing types that can be flexibly combined and separated as kids go off on their own, boomerang kids return, and childcare or eldercare support is needed.

Private and profitable

One point Parolek is eager to make is that these missing middle projects can definitely be built profitably since they are not dependent on nonprofit organizations to bring them to fruition, like many affordable developments, and they can provide marketing opportunities to sophisticated renters with no competition.
“When we opened our first renovated apartment building in 1996,” Spence recalled, “we assumed—based on patterns of the day—that our tenants would preponderantly be gay men moving from similar in-town neighborhoods. As it turns out, 75 percent of our first rent roll came from suburban addresses and 60 percent were single, straight women. While we definitely skew ‘urban’—artsy, alternative, adventurous—our rent roll has remained conventional in many ways:  educated, fiscally responsible, generally sober, 30s-ish, upwardly mobile, connected to the community, etc.”

While many missing middle projects have been built by smaller local firms like Good Space, Parolek also recommends them being integrated into larger master-planned communities and attracting larger regional and national builders. He sees that as a better development model and competitor to single-family build-to- rent that may be more appealing to city halls and statehouses.  

Jeff Kottmeier, senior vice president with John Burns Research and Consulting, points to employers acknowledging the need for attainable workforce housing in their conversations with economic development teams. “Some companies are coming to the table saying, ‘I’ll build x units of apartments or homes’ when constructing a new manufacturing facility,” noted. “We’ve seen that in some of the consulting studies we’ve completed in manufacturing towns.”

Rezoning and other challenges

Two of the reasons why this category has lagged are economic and regulatory barriers, though cities and states are looking hard lately at zoning changes to generate more housing opportunities. “Recently passed state legislation allows up to four units on any single-family lot in Oregon, California, Nebraska, and Washington,” Parolek reported. “A few other states like Montana and New Hampshire have legislation in the works.” He’s working with other cities to remove policy, planning and zoning barriers for missing middle housing development, he adds.

Julian calls re-zoning the low-hanging fruit of the housing affordability challenge. “Simply changing codes to legalize housing that is not the traditional large single-family home on a large single-family lot will allow housing that is naturally less expensive,” he observed “It is not the be-all and end-all, but there is little downside of zoning reform to allow missing middle housing development if housing affordability is a true priority.”

The NAHB executive notes that, for most home builders, there is little control over cost inputs like development fees, labor, materials and land. “Municipalities have the ability to alter codes and land use policy to make it legal to build smaller units on smaller lots, naturally producing more affordable housing,” he said.

New construction faces a particularly difficult route due to the need for land, regulations, and then basics such as material costs, according to NAR’s Lautz. “Adaptive reuse may be an easier route in some communities where there are existing vacant properties that can be rezoned for higher density residential housing,” she noted. 

Some cities, are encouraging infill/density where existing townhomes are torn down and rebuilt, adding an additional floor and more square footage. “Washington, D.C., is an example where you see homes with a fourth or fifth floor that can be rented as a single townhome or separate units,” Kottmeier said.

The biggest cost barrier is that any three-unit or larger housing types trigger the use of commercial building code, Parolek lamented. “We obviously do not want to create dangerous living environments, but it seems like codes make it far too expensive to build these smaller, multi-unit buildings,” he suggested, noting some three- or even six-unit buildings are actually smaller than large single-family homes. “Maybe research could be developed to help define less onerous and less expensive life-safety requirements for buildings up to 10 units to make them more viable.”

This is a bipartisan cause that increases property rights and also helps create more workforce housing for middle class citizens, Julian said. “Cities need to refine zoning to remove barriers and find more areas and processes to allow this,” he declared.

Advocates like Parolek are working on this. 

There is not enough affordable housing in the United States. For every 100 extremely low income households, there are only 29 adequate, affordable, and available rental units. That means two parents who both work minimum-wage jobs might wait years to find a safe, affordable place to live with their two kids. With such high demand, why aren’t developers racing to build affordable apartments?
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It turns out building affordable housing is not particularly affordable. In fact, there is a huge gap between what these buildings cost to construct and maintain and the rents most people can pay. Without the help of too-scarce government subsidies for creating, preserving, and operating affordable apartments, building these homes is often impossible. We’ll explain why. 

Why is there a gap?

Development costs a lot of money. Developers rely on loans and other sources to fund construction before people move in and start paying rent. But developers can only get those loans and equity sources if the development will produce enough revenue to pay back the loans and pay returns to investors. The gap between the amount a building is expected to produce from rents and the amount developers will need to pay lenders and investors can stop affordable housing development before it even begins, leaving few options for the millions of low-income families looking for safe, affordable homes.

The problem is even more difficult when you consider the poorest residents. In many places, the rent the poorest families can pay is too little to cover the costs of operating an apartment building, even if developers could build that building for free.

To illustrate this problem, we examined data from the Denver metro area, which is experiencing a growth in rental housing demand but is not a traditionally high-cost city. The rental housing conditions in Denver are largely representative of other US cities.

Uses

Buildings cost money to build: to developers, those costs are often called uses. The first major use is the land developers plan to build on, called the acquisition cost. In some cases, developers are able to use public land to develop affordable housing. But when that option is not available, there is little a developer can do to lower the land cost.

The next major development cost is construction. While a developer could make some decisions to minimize construction costs, they are largely determined by market forces. Construction costs for the various Denver properties we analyzed ranged from $8.8 million to $17.6 million, making construction the largest single use.

A third use to consider is the developer fee. This fee is built into the calculation of the development costs because a developer uses it to pay all the costs of doing business: hiring staff, running an office, finding new opportunities, and more. After all, developers can't build if they aren’t going to earn any money from the project.

Affordable housing developers can choose to defer a portion of the fee, leaving more money to cover development costs. The developers then recoup the deferred portion of the fee as rents are paid over time. This assumes, of course, that the gap is eventually closed, that the building is built, and that it operates successfully for years.

While these are three important uses a developer must account for, other costs include: design fees, construction loan interest, permanent financing fees, reserves, and project management fees.

Sources

To cover the costs of building and operating a housing development, developers rely on a number of different sources of money. One important source is debt. Developers borrow money from lenders based on the amount they will be able to pay off over time.

Though the current market affects the terms of the loan, it’s unlikely developers will ever get a loan big enough to close the gap.

To demonstrate this, we look at vacancy rates, generally an indicator of market strength. In a weak market, it might take longer to fill an apartment after a renter moves out, so you’d expect a higher vacancy rate. Repairs to an apartment in between occupants and other factors can also lengthen vacancy. Since the size of the loan is based on the future rent a building is expected to bring in, lower vacancy rates—and the resulting increase in income—should increase the size of the loan. Below, you can adjust the vacancy rate to see its effect on the gap.

Besides the loan, developers might fund development through tax credits or grants. These sources come with caveats, however. The tax credits a building is eligible for depend on how much it costs to create the property and on how much rent the developer plans to charge relative to the average income in the area. Additionally, federal, state, and local governments have limited amounts for tax credits and grants, so even if a development qualifies, funding is not guaranteed.

Closing the gap

Can we close the gap...with bigger loans?

It’s fair to ask at this point: if there aren’t enough grants or tax credits out there, why don’t developers just take out bigger loans to get the building off the ground?

In short, the lenders won't (and shouldn’t) let them. The size of the loan a bank will make depends on the project's net operating income (NOI), or the amount of money it expects to bring in from rent after accounting for operating expenses.

Lenders use NOI to calculate how much debt a developer will reasonably be able to pay off, accounting for interest and recognizing the developer still needs to have some cash flow to cover unexpected expenses.
But if the rent is set at rates that a working family can afford, that NOI is going to be quite low. It might even be less than zero if operating costs exceed revenue. The lower the NOI, the lower the size of the loan.

Can we close the gap...with more apartments?

So if you need a higher NOI to get a bigger loan, why not add more apartments to your building to increase the NOI? Though this will increase construction costs, some costs, like the acquisition cost and project management fee, may remain the same or increase more slowly, helping close the gap. You can see this to your right: the gap for the 100-unit building is proportionally smaller.

There are, however, some caveats. The first is a matter of economics. One of the big benefits of developing a building with more apartments is that tax credits might be more cost effective. But just because your project is eligible for tax credits doesn’t always mean you get them. Click the button below to see what happens when you don’t have the tax credit.

The other caveats are practical ones. Consider, first, that adding more apartments is only useful if developers can fill them, which might be possible in larger cities but harder as you move farther away from dense urban areas. Additionally, creating large communities of affordable housing has its social and economic downsides, particularly if it unintentionally segregates low-income families from the rest of a community. It all depends on the scale and shape of the particular place.

Can we close the gap...with higher rent?​

Charging residents more in rent might seem like an obvious solution, since it means higher property revenue, which leads to a larger loan. But when does affordable housing stop being affordable?

For a building to qualify for tax credits, the apartments must be affordable to families earning no more than 60 percent of the area median income (AMI). Additionally, many rent subsidies are targeted to extremely low-income families, or those earning less than 30 percent of AMI.

The current standard is that a family should pay no more than 30 percent of its household income on rent. Anything more is no longer affordable.

To make a unit affordable to an extremely low-income family of three, you could charge no more than $540 a month. You could charge up to $1,081 for a family of three and still qualify for tax credits, but now you risk shutting out extremely low-income residents, like a parent of two children earning $21,125 as a retail cashier.

Consider that in Denver, the AMI for a family of three is $72,100, so earning 60 percent of AMI means a family takes home $43,260; earning 30 percent of AMI means a family earns $21,630. A married telemarketer would earn $36,544 in Denver—slightly less than 60 percent AMI for a family of two. A person working full time but earning minimum wage, which in Colorado is slightly above the federal minimum, would be just above 30 percent AMI but still well below 60 percent.

You can choose to raise rent by either targeting higher-income (but still low-income) renters, asking renters to pay a larger portion of their income toward rent, or both.

So...how can we close the gap?​

Subsidies are essential to closing the gap.

Changes to land use, to regulations, or in what and how we build all will help close the gap, but we won’t get where we need to be without subsidies.
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Subsidies come in different forms. Some, like vouchers or rental assistance, help pay the rent, leaving tenants enough income to pay for other needs and making the property operate sustainably. Others, like tax credits, HOME funds, Community Development Block Grants, and housing trust funds help pay the costs of construction, development, or major repairs. No one subsidy can solve the affordable housing problem. Rather, a combination of programs including federal tax credits, state housing trust funds, local zoning decisions, and public land contributions can help affordable housing get built. To close the gap for affordable housing, especially for the lowest-income households, there almost always has to be assistance for both development and rental income over time.

In recent years, the multifamily real estate sector of the industry has experienced fast growth and change. The demand for and trends in multifamily homes have changed significantly due to urbanization, shifting demographics, and technological improvements.

It's critical to look more closely at what the future brings for this fascinating and dynamic profession. This article will discuss the newest real estate trends and forecasts for multifamily real estate. 

If you’re into property management and interested to learn more about this, then read on!

What is the multifamily market outlook for the United States?

The multifamily market outlook has in store for the United States is positive, with continued demand for rental properties driven by demographic trends, economic growth, and lifestyle changes. 

Despite some short-term uncertainties and challenges, such as the rise in interest rates and potential shifts in government policies, the long-term fundamentals of the multifamily market remain strong.

According to industry experts, the overall demand for rental properties is expected to remain strong in 2023, particularly in urban areas and among younger generations who value mobility and flexibility.

Additionally, the rise of remote work and changing work-life balance priorities is expected to continue to shape the multifamily market, with tenants seeking properties that offer amenities and features that support their lifestyles.

The transition toward more extraordinary urban life is also among the most significant trends that are anticipated to persist. Several variables, such as the demand for walkable areas, accessibility to public transit, and a desire for a more active social life, are driving this. As a result, it is predicted that developers will keep constructing high-density housing and mixed-use buildings in metropolitan regions.

The increased application of technology in the real estate sector is another trend expected to persist. It includes using virtual reality and other immersive technologies to assist purchasers and renters in perceiving homes. It also involves using AI and machine learning to evaluate data and facilitate decision-making.

Meanwhile, positive and negative trends build the real estate market updates to watch. Apart from those above, potential issues may affect the real estate market. One of these is an increase in interest rates, which may make it harder for purchasers to afford homes and cause the market to slow down. The real estate market may also be impacted by changes in governmental policy, such as tax reform or adjustments to immigration laws.

Yet, overall expectations for the US real estate market are optimistic, with the sector likely to experience ongoing expansion and innovation.

What are the Trends in Multi-family Real Estate?

There are various multifamily housing trends.

Here are some of them.

Sustainable And Green Structures

In the real estate sector, there is an increasing focus on sustainability and green buildings, and this trend is anticipated to continue.  Multifamily houses are getting increasingly ecologically friendly amenities, including solar panels, green roofs, energy-efficient appliances, and water-saving practices from developers.

Smart Home Technologies

Renters are growing more and more interested in smart home technologies, and multifamily property owners are beginning to include these amenities in their structures. These include voice-activated assistants, automatic window treatments, and smart thermostats.

Growth Of Co-Living Spaces

​Younger tenants are increasingly interested in co-living spaces, where residents share standard rooms and services. As more developers construct co-living facilities that provide distinctive features and community-focused living arrangements, this trend is anticipated to continue.

Flexible Work Spaces

There is an increasing need for flexible workplaces and coworking spaces in multifamily buildings as more individuals work remotely or launch their enterprises. In response, builders include these kinds of rooms and other adaptable features like furniture pieces and convertible areas.

Amenities For Remote Work

A remote workforce will increasingly require facilities like high-speed internet, coworking spaces, and private outdoor spaces; therefore, multifamily buildings must offer these.

Focus On Health And Wellness

The COVID-19 epidemic has sparked a new interest in health and well-being, and the multifamily market is projected to follow this trend. To accommodate this demand, developers are adding additional health and wellness features to their buildings, such as gyms, yoga studios, and meditation rooms.

Smaller Area Units

Smaller multifamily flats are becoming increasingly common, especially in metropolitan areas, due to rising housing costs. These apartments sometimes have lower rents, which appeals to younger tenants who value convenience over space.

In general, it is predicted that the multifamily real estate market  will be driven by an emphasis on sustainability, technology, and communal living arrangements that meet the expectations of contemporary tenants. Keep up with these trends and multifamily real estate predictions as part of your investment strategies!
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Certian markets provide better opportunities for multifamily property investment than others. Strong economic development, increased employment possibilities, population expansion, and a high demand for rental units are frequently seen in the greatest locations for multifamily investments.

The following are a few of the best markets for multi family investments:

Austin, Texas
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With a robust tech industry and a broad economy, Austin frequently ranks as one of the fastest-growing cities in the United States. The city also has a significant demand for rental homes, which attracts multifamily investors to the market.

Denver, Colorado

Because of its quickly expanding population, Denver has a robust employment market, a developing tech industry, and a high demand for rental homes. Compared to other large cities, the city's cost of living is comparatively inexpensive.

Phoenix, Arizona

Due to the city's appeal to seniors and young professionals, Phoenix has a robust economy, a growing population, and a high demand for rental homes.
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Nashville, Tennessee

Nashville has a solid economy, a vibrant music and entertainment business, and a burgeoning IT sector. The city also has a relatively low cost of living, attracting multifamily investors to the market.

Raleigh-Durham, North Carolina

Due to its expanding population and robust employment market, Raleigh-Durham is a rapidly expanding tech cluster with a broad economy and significant demand for rental homes.

The ideal markets for multifamily investments differ depending on variables, such as local real estate laws, population trends, employment growth, and economic situations. Before investing in any market, investors should perform careful due diligence and market research.
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The Bottomline:

It's critical to remain current on the newest trends and forecasts for 2023 and beyond if you are interested in the multifamily real estate sector. You may position yourself for success as an investor, developer, or property manager by knowing the variables that are causing a change in the sector. 
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There are numerous tools available to help you keep up with the most recent trends and advances, whether you're an experienced industry expert or just getting started. So don't wait; begin learning about multifamily real estate's future today, and be ready to embrace the possibilities that will come your way.

​Nation's Biggest Mall Landlord Steps Up Efforts To Diversify, Transform Its Retail Centers

Simon Property Group, the nation's largest mall owner, expects to spend roughly $1.5 billion building 2,000 multifamily units and hotel rooms as it looks to add density and expand some of its retail properties in new ways.
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The Indianapolis-based landlord estimated it will have construction of the projects completed over a five-year span, CEO David Simon said Tuesday on a first-quarter earnings call. He discussed the real estate investment trust's pipeline of apartments and hospitality properties while pointing to what he described as the company's successful redevelopment of Phipps Plaza in Atlanta, a mall that now has a Nobu hotel and restaurant and Life Time fitness center on its site.

Mall owners around the nation have been diversifying and adding density to their centers, bringing in nontraditional retail uses to help drive foot traffic and to take the place of vacant anchor tenant space and unused surface parking lots. And now Simon Property is stepping up its efforts on that front.

“We have several densification projects under construction and a pipeline of identified projects," David Simon, who is also the company's chairman and president, told Wall Street analysts.

"Now that’s not going to happen overnight, but that’s going to happen over the next few years," he said. "So that to us is a real opportunity.”

Simon Property expects to start work on several of these projects this year, but the CEO said the REIT is "frankly being a little bit cautious."

Simon said, "We’re still permitting some things in California and the Northwest. So we’re going to just see how the world is."

Plans for Texas, California and Florida​

Asked about the cost of the multifamily units and hotel rooms, Simon said it is hard to isolate them from overall mall redevelopment efforts.

"But my instinct would be probably about a billion and a half dollars. ... Somewhere in that range" for the construction, he said.

The CEO didn't offer too many details. But he said some of the residential units are planned for Austin, Texas; Orange County, California; and Seattle. In terms of hotels, they will be headed for Florida, as will some residential units, according to Simon. 

“It’s kind of where you would expect it to be, where supply and demand is in our favor,” he said.
The REIT is also considering building a hotel on Cape Cod, Massachusetts, because there would be a demand for it there, according to Simon. 

The CEO didn't specify which malls, if any, the 2,000 units would be built and added to. But Simon did refer to the reimagining of Phipps Plaza in the Buckhead section of Atlanta.

"As we give back real estate through our redevelopment efforts, the big focus is on where we can add some mixed uses, because we do think that what we did in Buckhead is having a tremendous impact on the overall value of that real estate,” Simon said.

Possible Joint Ventures

There are several ways the company could finance the construction, according to the CEO.

“I think we will do selective [joint ventures] on certain of the residential development," Simon said. "And it also may be that we could potentially bring in third-party equity, too. We’ll look at each deal individually. But that’s certainly a possibility.”

Last October, Simon Property acquired a 50% stake in developer Jamestown as it looks to expand and wring new revenue from its portfolio by diversifying its shopping centers. Jamestown has been involved in landmark projects such as Chelsea Market in New York City.

The CEO also said leasing demand is strong at Simon Property's malls and that the properties are getting a boost because tourism is coming back.

The 2.8 million-sf development will include 36,000 sf of restaurants, retail space. ​

​ $1 billion residential project, The District in Davie, will bring 1.6 million sf of new Class A residential apartments to the hot South Florida market. Located near Ft. Lauderdale and greater Miami, the development will include 36,000 sf of restaurants and retail space. The development will also provide 1.1 million sf of access controlled onsite parking with 2,650 parking spaces. 

The project, a redevelopment at the site of a dated shopping center, will be marketed as the new “front door to Davie,” targeted to young professionals. Amenities include a pool and 24-hour fitness/spa treatment room, a penthouse level Sky Lounge reservable for indoor and outdoor entertainment with kitchen and seating, and ground floor storefront spaces.

Planned lifestyle amenities include pet-friendly features such as bark parks and grooming stations, game lounges and children’s play suites, as well as multiple work-from-home accommodations including co-working spaces and meeting rooms.

The project’s five buildings will range from 20–24 stories, each level offering thoughtfully designed studio, one-, two-, and three-bedroom apartments, some with dens. Unit sizes range from 589 sf to 1,460 sf. Each unit will provide keyless entry, high-speed Internet, and smart thermostats.

Outdoor social spaces will include rooftop pools, outdoor kitchens, fire pits, and green spaces for outdoor yoga, games, and movies. Planned green elements include electric vehicle charging stations in garages, complimentary bicycle parking/storage areas, and LED lighting technology for energy efficiency.

Light-filled rental apartments include exceptional finishes, flexible layouts, and state-of-the-art appliances. Designed for the South Florida lifestyle, the rental units prioritize indoor/outdoor living with ample glass and private terraces on each floor. The apartments are complemented by a robust amenities package for multi-generational appeal.

​Phase one completion is expected in 2025.

Look around. If you're a multifamily housing investor, you've seen a steady increase in the number of condos and apartment complexes popping up everywhere. Currently, 35% of the U.S. population is renters, and that figure is rising. However, for owners and operators of multifamily communities, attracting and retaining residents will depend on the ability to integrate amenities and services that meet the expectations of today's (and tomorrow's) increasingly savvy residents. The emergence and adoption of cutting-edge technologies is just the ticket for meeting that challenge.
Here are five predictions that I believe will gain momentum and revolutionize the work and leisure lifestyles for residents as well as optimize investments for owners and operators.
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1. Prepare to experience a virtual living space beyond your imagination.


Virtual and augmented reality technologies are reinventing the leasing process for both agents and residents. The savings in time, effort and costs for leasing agents are substantial. Donning lightweight AR headsets, prospective residents can tour multifamily communities online and enter a virtual world where realistic avatars walk them through floor plans and community amenities.
Digital layouts can allow renters to visualize how their existing furnishings will fit, experiencing how it would feel to actually live there. This virtual staging can eliminate on-site staging and photography costs, reducing the time, staff and office space needed to maintain property portfolios.

Strategic planning and problem-solving for properties can be done directly from the office. VR can be effective for employee training, and AR glasses in the field can enable maintenance staff to collaborate with the central office for issues and repairs. Virtual application possibilities are endless and can enhance the experience for both operators and potential residents.


​2. Retire your leather billfold for a crypto wallet.
Cryptocurrencies like Bitcoin are gaining wider understanding, acceptance and use across many industries. There has been a steady climb in consumer interest and investment, particularly among Millennials.

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A form of potential online digital payment for goods and services, crypto relies on blockchain technology that tracks and records each transaction in a decentralized manner through a distributed ledger. Its secure data sharing and strong privacy can eliminate attempts at data manipulation. With tight security, transparent record-keeping, instant transfers and no government controls or "middleman" fees, cryptocurrency may become an attractive option for multifamily operators as well as residents.

Some forward-thinking multifamily operators are already accepting Bitcoin for rental payments as well as offering Bitcoin rewards for positive resident behaviors and referrals. As Forbes notes: "Blockchain can make MLS property data more centralized and accessible, [with] title records easier to track and transfer." Multifamily operators would be wise to keep a watchful eye on this rising currency movement and consider the many benefits and applications.

3. Kick the traditional parking garage to the curb.

Instead of vast underground lots with space(s) designated for every unit, multifamily parking in the future may look quite different. Owners might partner with car share companies for residents to use the services of electric cars only as needed. Dedicated pickup and drop-off zones would allow for the convenient use of autonomous vehicles and rideshare services.

Residents with a focus on "green" initiatives already rely on public transportation and walkability factors. Bike storage, rental amenities and other reward incentives for carless residents should attract rental applicants to properties offering these features.

With less dedicated parking, multifamily owners can use the reclaimed space for amenities like halls for community activities or even shared VR rooms.

4. The knock at the door could be your bot buddy.

Consumers have developed high expectations for service delivery, and technological innovations are rising to meet these demands. What once seemed like science fiction is fast becoming reality.

For example, Amazon has patented blimp warehouseswhere AI-based drones will fly back and forth to pick up packages and deliver them to drop zones below. By early 2022, Wing—Alphabet's drone service—had already made 200,000 deliveries.

In the very near future, multifamily communities could provide myriad drone and bot services to benefit residents and improve the bottom line as they deliver right to your door. With NASA working on urban air mobility maps of metro air spaces, this futuristic image of autonomous drones above and robots below is no longer far-fetched.

5. Net-zero emission designs will bring sunny days for multifamily units.

The promise of lower utility bills can be a major incentive in choosing a unit. Multifamily operators are capitalizing on the benefits of cheap, clean and renewable energy sources.

According to the Net Zero Energy Coalition's latest report, multifamily living now accounts for 58% of all net-zero carbon units in the U.S. that are under construction, newly completed or in the design phase. In California, all new multifamily housing construction must have solar panels for dwellings up to three stories.

Communities sharing solar arrays, energy allocations and credits will be distributed across multiple user accounts. Common areas converted to solar could save thousands or millions each year, and revenue from the sale of excess energy can lead to a quick ROI and future revenue growth. Most importantly, many residents should be attracted to units with cost-saving amenities and "green" initiatives.

Embrace transformation for the new multifamily paradigm.

There's no crystal ball to affirm my predictions, but I'm certain these and other transformative technologies will reshape our work and leisure lifestyles—not to mention the multifamily living experience—in ways we can't even begin to imagine.
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Multifamily owners and operators should plan now for the future and integrate these trends in some manner over the next three to five years. Those who make the leap should gain a competitive edge. Start building community into your properties while providing the kind of cutting-edge advancements and amenities that residents are seeking. Happy long-term residents (and a healthy bottom line) should be your reward.