With mortgage interest rates currently averaging 7.1% and hybrid work models becoming the norm, home ownership is not in the cards for many in 2024, all while people are spending more time than ever at home.
The truth is, modern renters don’t all want to live in a 16-story high-rise with 800 neighbors and a leasing team that is more focused on commissions than the community members. That’s where boutique living comes in, offering a viable and attractive investment opportunity for savvy developers and investors.
The term "boutique" gets thrown around a lot in multifamily real estate. When you hear "boutique," you might think of local shops selling sundresses and graphic tees that say "Team Bride" and "DOG MAMA". However, in real estate, the term, which originated in the hospitality industry in the 1980s, describes small to medium-sized buildings with distinct spaces and unique characteristics. There are boutique hotels, law firms, brokerages, and you guessed it- apartments. But living in a quadplex doesn't necessarily make a community "boutique." In our opinion, it's the elevated design, decor, location, and management style that truly make the difference.
In 2024, U.S. apartment occupancy rates hit a decade low as a wave of new units flooded the market. Even the hottest markets are struggling to maintain occupancy rates amid the 670K units expected to be delivered in 2024. Large-scale complexes are facing challenges in stabilizing their 800+ unit projects when they compete against a half dozen others all in the same city block.
Boutique communities, on the other hand, tend to offer higher per-square-foot averages justified by the design, decor, and location we mentioned earlier. With a smaller unit mix to fill, stabilizing 150 units in a highly desirable neighborhood is more feasible, yielding a higher Net Operating Income (NOI) in a shorter amount of time.
The old saying goes, mo' money mo' problems. Though you'll still need to have a sizeable amount of capital just to break ground, boutique buildings typically feature fewer units, resulting in lower overall purchase prices. This makes them more accessible to investors, allowing for greater portfolio diversification. By spreading investments across multiple smaller properties rather than committing substantial capital to a single large complex, investors can mitigate risk and increase potential returns.
With fewer residents, boutique buildings allow for a more highly personalized living experience, which can justify higher rents. According to the Urban Land Institute's "Emerging Trends in Real Estate 2024" report, boutique buildings in desirable urban areas have seen rental increases of 8% year-over-year, compared to the 5% increase for larger complexes. This demand for one-of-a-kind, well-maintained living spaces translates into higher per-unit revenue, enhancing the overall return on investment.
Boutique buildings often foster a close-knit community atmosphere, leading to higher resident satisfaction and retention rates. Happy tenants are more likely to leave positive reviews, participate in referrals, and renew their leases, reducing turnover and the associated costs. This stability ensures a steady income stream for investors, making boutique buildings a more reliable investment.
We would be remised if we did not also mention the risk of boutique community investments in this regard. One 3-bedroom vacant apartment or unhappy residents looking for lease breaks can really put a damper on your NOI. This is why hiring decisions management companies make can make or break a lease-up. We cannot stress this enough, your site team is your greatest amenity.
Speaking of management- smaller properties are generally easier to manage and maintain, offering significant benefits for individual investors or small investment groups. The hands-on management approach enabled by boutique buildings allows for the swift implementation of changes and improvements to meet market demands and tenant preferences.
Additionally, boutique buildings offer greater flexibility in financing. The lower cost of these properties often makes securing loans easier than larger complexes. The active resale market for smaller properties provides various exit opportunities, whether investors aim for long-term appreciation or short-term profits.
Boutique buildings are often at the forefront of sustainability and innovation trends. They can more easily incorporate energy-efficient systems and LEED certifications, reducing operating costs and appealing to environmentally conscious tenants. The federal government offers tax benefits for LEED-certified buildings through the Energy Policy Act, Section 179D.
Savvy investors often take Uncle Sam up on this offer as it allows building owners and designers to claim tax deductions of up to $1.80 per square foot for achieving significant energy savings compared to a baseline building. The greener the building, the greener your pockets come tax season!
Boutique buildings challenge the conventional wisdom that bigger is always better. Offering lower entry costs, higher per-unit revenue, enhanced tenant retention, and greater flexibility in management and financing, these properties present a compelling case for investors seeking strong returns. As the real estate market continues to evolve, those who recognize the value of boutique buildings will likely be at the forefront of investment success.
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