Introduction:
What are the three most important indicators of successful multifamily investment performance? Read the whole article to know everything you should know.
Investing in multifamily homes has shown to be profitable for real estate investors over time and a reliable method to diversify a bigger investment portfolio. However, there were several challenges in the financial and investment markets at the start of 2022. Inflation and interest rates are rising, firms are suffering from supply chain and labor difficulties, and the stock market is off to its worst start since 2009. Some of these trends will certainly affect multifamily investment returns in 2022.
Why do investors favor multifamily housing?
The multifamily asset class has much to offer regarding commercial real estate investment.
Necessity
First and foremost, everyone requires a place to live. As a result, in times of economic crisis, individuals are more inclined to prioritize their housing bills. This may be seen during the pandemic’s peak when multifamily occupancy numbers were relatively consistent when compared to offices or some types of retail properties.
Affordability
Second, the obstacles to entry for a multifamily unit are substantially lower than those for single-family housing, particularly in cost. As single-family home prices continue to outstrip wage growth, they become increasingly unaffordable. This is especially true in large metro regions like Florida, Texas, California, and New York (Miami, Dallas, Austin, New York City, and Los Angeles), which have experienced significant population growth. Given the affordability issue, multifamily housing is a more inexpensive option.
Efficiency
Real estate investors adore the scale and efficiency of multifamily properties. Because all the units are in a single location, leasing, repairs, and property administration are simplified and more cost-effective.
Liquidity
Finally, multifamily properties are in constant demand among individual and institutional real estate investors. When contrasted to other property categories, this provides them with some liquidity. Furthermore, they tend to sell for higher prices/lower cap rates, which aids in profit margins.
These statistics apply to all multifamily residences. However, investors should be conscious of potential tails and headwinds when they explore commercial real estate investment prospects over the coming year.
The age-old dilemma of whether or not today is a good time to invest still plagues many investors and their advisors.
When it comes to earning money over the long run, investing over time has proven to be more essential than investing at the right time. You’re probably used to hearing this response if you’re an advisor. As a result, whether you time your investments by coincidence or on purpose, the long-term return on your investment might be affected by your ability to time your investments well.
Over the next few years, leading indications and underlying trends point to robust multifamily investment performance. In this post, we’ll go through each of these patterns and how they might be used to help you make future financial decisions.
Amount of difference between the cap rate and the borrowing costs of multifamily properties Historically, a wide gap between the interest rate on the 10-year U.S. Treasury bond and the median cap rate is an outstanding signal of great future multifamily property performance.
1. The difference in Multifamily Cap Rates and Borrowing Costs
As history shows, a wide disparity between the median cap rates of stable multifamily properties and the interest rate on the 10-year U.S. government bond is sometimes an outstanding leading signal of great future multifamily property performance.
Consider 1993, 2002, and 2009, the three highest peaks before 2020, even though the rule of thumb states that past performance isn’t always indicative of future results. Private multifamily real estate generated an average annual return of 17% in the five years after each of these peak years, according to the NCREIF Apartment Property Index.
There is a ten-year high for the cap rate spread right now (in 2020).
The number of renters in the United States climbed by 19.6 million in the decade before 2017. According to recent projections by the National Apartment Association and the National Multifamily Housing Council, the United States will need to build 328,000 other apartment houses per year to meet the rising demand from renters. Over the past decade, the average number of new multifamily units produced yearly has been just 239,000.
According to data from the U.S. Census Bureau, the national vacancy rate has fallen to 6.8%, the lowest since the mid-1980s. As of the third quarter of 2019, vacancy rates in most U.S. markets fell by 0.7 percent year-over-year, according to RealPage.
Rent increases in multifamily properties are expected to outpace inflation in the United States for the foreseeable future. When comparing the Consumer Price Index (CPI) to year-over-year rent growth for multifamily buildings, CPI inflation was recently reported at 2.3%. The percentage is lower than multifamily properties’ 3.7% annual rent growth.
An asset’s worth is determined by the level of demand for the asset compared to the available supply. In other words, if renter demand continues to outpace supply in the coming decade, prices will rise due to increased demand.
But who or what is driving these principles of supply and demand?
3. Changes in the Demographics of Renters
The Millennials and Generation Z comprise the largest segment of the U.S. population, with a combined working age of approximately 18-34 years. Approximately 39 million Americans in this age bracket are renters, making up most of the country’s rental market. Renters already number over 100 million in the United States, a record level that is anticipated to rise much further in the coming years, with new records expected to be set virtually annually. However, this cohort is not the only one that will impact the fundamentals of renting and multifamily demand in the future.
Knowing which demographics will continue to fuel most of our country’s population expansion is crucial because this is a significant macro driver of multifamily investment performance. About half of U.S. population growth is expected to be artificially generated, according to a report by the National Apartment Association (NAA). Net migration to the United States accounts for half of the predicted growth. More than 70 percent of immigrants who moved to the United States in the last five to ten years rent, but just 35 percent of native-born Americans currently rent. The number of renters in the United States could continue to rise as immigration continues to fuel population expansion in the United States.
High-income renters are also becoming more common. According to the National Multifamily Housing Council, renter households with $75,000 or more earnings accounted for over a quarter of the total renting population in 2019. 18% of the overall renting population included this same generation from 1990 to 2010. Over the long term, it will be good news for rent growth if the high-income renter population continues to grow.
How Many Apartment Residents Make More Than $75,000 a Year?
Microdata from the U.S. Census Bureau’s 2018 Current Population Survey, Annual Social and Economic Supplement. A new version was released in 2019. All age and income groups will be driving demand for apartments as renting become more of a lifestyle option and less of a financial one.
We have no reason to assume that the multifamily industry will not continue to grow. Also, we feel that good market timing can be a significant accretive factor to your client’s return on investment, as well as the fact that there is currently no information to suggest otherwise. Multifamily assets in some of the fastest-growing U.S. markets.
In any volatile market, the focus must return to the fundamentals of property underwriting. Multifamily properties should be underwritten using conservative growth and vacancy rates and rental levels based on statistics. Value-add investment properties should include realistic improvement expenses that account for inflation. Special attention should be devoted to lending arrangements to limit the risk associated with rising interest rates.
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