One of the effects of COVID-19 is that people are less interested in living in high-rise apartments with shared amenities. It's unclear if that's going a long-range trend, but developers are already preparing by creating horizontal multifamily developments.
What is horizontal multifamily?
A horizontal multifamily property puts multiple units on the same property. In some cases, the units share common walls; in others, they're completely separate buildings. The units generally share some amenities, like a pool or a laundry room, but unlike vertical apartments, the appeal of these features isn't the draw. Lawn and property maintenance is handled the same way as in a traditional apartment building. These properties can be relatively small but tend to be larger properties with dozens of units.
Horizontal multifamily development was rising in popularity before the COVID-19 pandemic. Similar to the "build-for-rent" movement, horizontal multifamily offers the benefits of an experience that feels closer to homeownership. In 2019, CNBC called it the "fastest-growing trend" in housing. This has only become more true in 2020, with people unable or unwilling to use the amenities in large apartment complexes.
As home prices keep hitting new record highs, many millennials are settling for a rental property instead. In addition to being popular with millennials, horizontal apartment communities are also winning favor with seniors, who may not want to navigate stairwells as they age.
Satisfying a growing market
Horizontal multifamily buildings tend to be popular in places where there's potential to acquire more land, such as Texas and Arizona. Right now, people are moving away from large coastal cities and into suburbs, which dovetails nicely with these locations. One of the fastest-growing single-family rental companies, AHV Communities, is focused on Texas and Southern California, as well as large Sun Belt markets. Christopher Todd Properties, which partners with Taylor Morrison Home (NYSE: TMHC) to build rental communities, has multiple developments in Arizona.
For individual property investors, it can be easier to finance a horizontal multifamily project than a group of single-family homes even if they're in the same neighborhood. In general, a horizontal apartment or single-family rental can command a higher price point than a traditional apartment. However, this isn't always the case, so it's important for any potential developer to evaluate the local market to make sure a potential project will pencil out.
Downsides of horizontal multifamily
The biggest downside of horizontal multifamily is that it takes up a lot more real estate than a single building with units stacked on top of each other. This means rents will have to be high enough to justify the owner's expenses. It can also be hard to find land near large cities. One way some developers have countered this is through infill development, putting multiple tiny homes on a single lot.
Another concern is the ever-shifting tastes of the renter. While remote work has encouraged people to move out to the suburbs, that trend could easily shift again. After the Great Financial Crisis of 2008, many people moved back toward cities and created interest in those areas, causing prices to drop in many suburbs.
An owner will also need to factor in the expense of a sprawling community. In some ways, a single multifamily building can be easier to maintain: There's only one roof, and maintenance and landscaping costs may be lower. Horizontal multifamily tends to be more popular in markets where there isn't a lot of snow to plow each year.
The Millionacres bottom line
Housing continues to change to meet the needs of our growing population, and multifamily living will be a major part of that future. Horizontal multifamily lets renters have the best of both worlds: an apartment where maintenance is taken care of as well as privacy and potentially a backyard. Both single-family built-to-rent homes and horizontal multifamily projects are likely to increase in the coming years.