What’s on the horizon for the multifamily property sector in 2017? Today, we’ll take a look at PwC’s report on emerging real estate trends, and focus specifically on its most relevant multifamily insights.

Trend 1: Optionality

Optionality is an increasingly popular way for multifamily investors to navigate a volatile market where there isn’t just one way to use a building, or one type of user profile.

Essentially, optionality allows a building to be multipurpose for both residence and office space. Space is used on an as-needed basis, meaning it’s attractive to gig workers and small firms that don’t require entire buildings.

Other touted perks include the potential for collaboration and community building, as well as shared amenities like spa and recreation facilities.

Optionality and Marketing to Millennials

For the multifamily property sector specifically, optionality is ideal when playing to the Millennial market. The Millennial generation likes to keep its options open, and hasn’t been as quick as previous generations to settle into careers, families or home ownership (according to the report).

The report goes on to say that some developers are looking to balance Millennials’ desire for quality units with their reluctance to purchase by developing condo-quality rental units.

Another aspect of optionality and marketing multifamily properties to Millennials is projects that appeal to multiple generations, such as Baby Boomers and Millennials. Many of them might appreciate the same amenities, but are looking for different sizes and price points for their living space.

Trend 2: Small Entrepreneurial Development

Innovation often comes out of small-scale project development, and as of 2015 (the most recent data available), 91 percent of firms in the multifamily sector employed fewer than 20 people (according to PwC’s data).

Smaller developers can leverage their nimbleness and local knowledge to grow their role in the industry and make the most of limited capital. Then, they can address needs of affordability, and fill in older neighborhoods and the smaller markets left behind by large firms.

The bottom line for the multifamily property sector in the United States is that the base of small and medium-sized developers is far-reaching and solid, and the sum of these contributors’ efforts can lead to significant change in the long run.

Trend 3: Labor Scarcity and Inflated Construction Costs

As Baby Boomers phase into retirement, and Millennials increasingly seek higher education, fewer people are available for construction labor. Some in the industry also cite clampdowns on Mexican immigration and employment opportunities in the oil and gas industry as drains on labor.

As one multifamily housing specialist told PwC:

“Labor availability and shortage will continue to have a significant impact on the market. The shortage ranges from laborers to more skilled labor. This is pushing up the development time on projects and is cutting into returns. The shortage of labor has slowed the number of units being delivered to markets and may have helped prevent overbuilding in 2016.”

At the same time as these construction delays, costs of construction are rising. This leads to a high concentration of luxury housing projects, where the balance between labor and cost is more favorable.

Meeting the Challenges by Exploring Other Multifamily Trends

Going back for a minute to the idea of optionality, some developers are trying to combat the high rent rates with smaller apartments and adaptive use of existing office and warehouse buildings. In step with this, new construction appears to be slowing at the national level.

We touched earlier on appealing to the various generations. We think a lot about Millennials and apartments, but many empty-nester Baby Boomers are interested in luxury urban apartments as they move out of the suburbs (according to the report).

Where margins may be slim, developers might target this market with projects in urbanized inner suburban rings.

Keeping up with Multifamily Trends

For multifamily property owners and operators the market is, as we said toward the beginning, often volatile. As lifestyles and living preferences change in the U.S., multifamily properties will have to adapt when it comes to filling their space by marketing to various generations and selecting locations that drive profitability.

If they can follow the trends and meet the challenges described in the PwC report, multifamily owners and operators might just improve the outlook scores for 2018.