The Hunt for Yield in Multifamily Investments
The goal of investing in multifamily properties is to be able to discern winners from losers within diverging markets. Like all investments, anticipating the future, understanding the supply and demand, and analyzing the critical risk factors will determine outcome.
Will the future resemble the past? There is a multitude of issues to address in addition to just interest rates, cap rates, and the dearth of investable capital. Millennials are aging and as they do through the middle of this decade so will the housing choices they make. Renter demand from this cohort will most likely shift from urban to suburban locations with a greater influence on schools and affordability. The baby boomer generation will also be shifting their housing choices as they downsize and move from suburban ownership to more urban living in apartments or condominiums. Additionally, Gen Z will likely be forced to rent as they bear the brunt of indebtedness and underfunded government programs created by their parents and grandparents. Lastly, from 2000-2010, immigration fueled one-third of population growth, creating further demand for multi-family housing – a trend we anticipate will continue1.
High paying jobs will shift and become less geographically concentrated due to a greater acceptance of work from home adoption and the search for affordability driving locations with a lower cost of living and a lesser state income tax burden. John Burns Real Estate Consulting anticipates that over the next decade, 62% of household growth will occur in Florida, Texas, the Southeast, and the Southwest. As it relates to rental product, the designs of the living space and property amenities will be key to attracting and keeping renters satisfied.
Regulatory risk is always a factor to consider and they can take several shapes. The more near-term risk is real estate taxes and the amount of burden that is shifted to commercial property owners as municipal budgets get strained and require additional funding. The recent CARES Act created new regulations which temporarily took away landlord’s rights to evict non-paying tenants. Could this be the first step in limiting the ability to control your property rights? There is also increasingly left-leaning politics in many states which suggests that rent control risk is not going away either.
Carefully thought out financial modeling is paramount to understanding the risk-return profile of investing in multi-family properties. In the end, the most important factors are location, acquisition price, and execution of a well thought out business plan. Diversification of investments is important in order to reduce idiosyncratic risk tied to any one particular asset, with an optimal allocation being spread across a number of Real Estate assets.
Our investment thesis is driven both by bottom-up property selection and top-down macro views, allowing for an investment strategy that is accretive to our investors, while avoiding unnecessary risks.
[1] Burns, John. Big Shifts Ahead: Demographic Clarity for Businesses. Advantage, 2016.
