💼 Multifamily
briefcase | invest smarter | Issue #121
“Ouch” — Office Space
💪🏽 MultiPower
Over the last decade, the multifamily asset class has outperformed most others by a wide margin. Despite the current “winter is coming” moment for commercial real estate (CRE), multifamily looks like a small bright light in a sea of misery and pain.
WMRE’s recent High-Net-Worth Investor (HNWI) Survey found that the most favored sector among HNWIs is… 🥁🥁multifamily.
A full 79% of respondents to the survey said that the multifamily sector was most favored, followed closely by industrial.
So why is multifamily so appealing to investors and HNWIs? It comes down to simple supply and demand.
1) We Aren’t Building Enough Apartments
Does anyone have 4,300,000 apartments lying around? Seriously, we’re going to need them.
According to the National Multifamily Housing Council (NMHC), that’s how many units America needs by 2035 to satisfy the frenzied and growing demand for housing.
Further, this projection includes 600,000 apartments (buildings with 5+ units) that are missing from the existing supply to simply meet the current demand. We just aren’t building enough:
And, if you live in Texas, Florida, or California, the shortage is even more dramatic. In all, these states account for a whopping 40% of all future demand (1.5M apartments).
“The lack of available housing is holding our country back. Whether it is a multifamily residence, duplex or single-family home, we need a massive supply of new for sale and rental homes—including millions of new apartments by 2035.”
Although apartment rentals are not abundant, what is abundantly clear is that we need way more of them. Like, a lot!
And, investors seem to trust multifamily more than other asset classes, as Fannie Mae recently noted:
“With a recession potentially looming, as well as consumer confidence weakening, it appears that many commercial real estate investors are deciding that future demand for multifamily is a better bet than for other property types, such as office or retail. Indeed, as of May 2022, office and retail cap rates remained well over 100 basis points higher than multifamily cap rates, averaging 6.3 percent and 6.4 percent, respectively.”
2) Vacancy Rates
Although rising as we enter troubled economic waters, the vacancy rate for multifamily assets is projected to remain at historical lows.
The reality is that we have low vacancy rates for multifamily units across North America. According to central bank data, we are currently enjoying just below a 6% vacancy rate across the country.
Other CRE assets be like…
3) Rents
And if that isn’t sexy enough for you, rents are stubbornly high, meaning revenue from multifamily will continue to outperform other CRE assets. According to Zumper, year-over-year rent growth peaked near 15% last year, and now sits at a more modest 6%.
Further, stability is entering the market again as rent growth decelerates, which is good. According to Apartment List:
March’s 0.5 percent increase represents a slightly faster rate of growth than we saw last month, confirming the rents are firmly back on an upward trajectory. That said, year-over-year growth fell again to 2.6 percent – dipping below the pre-pandemic average from 2018 to 2019 – and will likely decelerate even further in the months ahead. And even if demand continues to rebound, a strong construction pipeline should temper rent growth for the remainder of the year. Prices may not fall further, but they are also unlikely to increase significantly.
4) (Relative) Affordability
Single-family homes are simply unaffordable for a large chunk of the population. With elevated interest rates, this reality will only be exacerbated.
Over the coming years, as these higher interest rates settle in, many would-be first-time homebuyers will be priced out of the purchase market. This will turn (or keep) more and more consumers into renters.
Although a headwind for our entire economy, this unfortunate reality will help buoy the already strong demand for rental apartments.
So What? Savvy investors who don’t already have exposure to multifamily assets should seek some out. Although we have to watch our debt loads and LTVs, investors should be in the market for multifamily investments.