Contrary to the current media narrative, certain real property segments—namely multifamily—have and continue to demonstrate solid performance.
by Max Sharkansky
Fact: Inflation, fast rising interest rates, recent bank collapses, concerns about recession have all made deal financing more difficult this year than it has been in a decade.
Fiction: The investment world is doomed, and the smartest thing to do is keep your head in the sand, your money in your mattress and wait it out.
Contrary to the narrative, certain real property segments—namely multifamily residential—have and continue to demonstrate solid performance. In full disclosure, that is precisely what my company does. So of course, I wave the flag of multifamily real estate sponsors—but more fittingly, so do our investors. Those seeking to preserve and grow wealth during this volatile period should at least explore this asset class. Here are four autonomous truths that support why:
- Rent management as a natural inflation hedge
Since March 2021, the national average rent in multifamily buildings had risen from around $1,400 to just over $1,700, a 14.7% annual growth rate. Inflation at its peak in June 2022 was running only 9% annually. Additionally, rents are still rising, just not as fast as in 2022, with a nationwide year-over-year increase of 4%. The March inflation number from the U.S. BLS put annual CPI at 5 percent. Where rents are dropping, the decreases are minimal. Of the 30 major markets tracked by Yardi Matrix, only two, Las Vegas and Phoenix, registered drops in asking rents. Further evidence of multifamily as inflation protection is the trend in lease renewals. Renewal rent increases are outpacing new leases with an average increase of 9.3%, even as the national lease renewal rate remains consistent at around 64%. The ability to regularly reset rent compared to other commercial properties makes residential an ideal investment during inflationary periods.
- Positive supply dynamics
In 2023 and 2024 close to 70,000 new units are expected to come on-line in the New York metro—that’s the most in the country and it seems like a large number. However, a better metric for current multifamily supply dynamics is inventory growth. When measured as a percentage of total available units, new supply growth for the next two years in New York is only 2.76%, ranking 90th out of all 142 metros. Another well-documented city facing cries of oversupply is the Dallas Ft. Worth metro, which ranks second in the number of new units coming to market. Dallas drops to 29th when looking at inventory growth, with 7.74% growth for the next two years. But Dallas-Ft. Worth Metro is the fastest-growing metro in the country! The city’s recent population growth averaged around 1.4% annually since 2020 and its job growth in 2022 was 6.5%. By 2035, Dallas is forecast to grow by 1 million new residents to nearly 7.4 million people. Such strong growth should absorb any new supply in the coming years. However, let’s not forget, additional near-term supply that hasn’t already been financed will be constrained due to higher interest rates and construction costs as a result of wage and building material inflation. Limited supply is bullish for multifamily investments.
- Positive demand dynamics
Demand for rental housing in the U.S. is being driven by high interest rates and continued high home prices. According to Freddie Mac, with the current median U.S. home price at over $400,000 and national mortgage rates at nearly 7%, there are around 14 million fewer potential home buyers. These potential buyers become continual renters. In fact, according to a post-COVID survey by Apartment List, within the millennial generation, the largest demographic in the U.S., 18% expect to rent their housing throughout their lifetime. Additionally, even with the background of border issues and immigration reform, the U.S. accepted over 1 million legal immigrants in 2022. According to the National Multifamily Housing Coalition, over 70% of immigrants in the U.S. who are in the country for less than five years rent their homes. All in all, there is substantial demand for rental housing that is not expected to dissipate in the coming years.
- Growing access to alternative financing
Private credit, alternative lenders and creative financing techniques are stepping in where commercial banks have stepped away. Institutional investors have substantial “dry powder” available for investment. With many more common investments, like venture capital, looking less lucrative and traditional bond investments looking less palatable, investors are seeking the additional yield from real estate lending that has traditionally been the market of commercial banks. Non-bank alternative lenders increased their share of the lending market to over 16% in the first half of 2022. That number is expected to rise substantially in 2023, particularly considering the SVB and Signature Bank failures. Where smaller lenders are doing deals, many are getting done creatively to combat high interest rates. Recent media reports highlight hybrid/assumable loans for multifamily properties that have been underwritten with rates between 4.75% and 5.00%. Other creative financings include seller-retained ownership deals structured to ensure that debt service works over the initial years of the loan.
Need more reasons to be bullish on multifamily during this volatile time? Consider municipal support for office to residential property conversions or the expectation that the tidal wave of coming loan maturities will drive many current owners to sell at discounts. Today, these four aspects remain at the forefront.
Max Sharkansky serves as managing partner at Trion Properties, a multifamily real estate investment sponsor and private equity firm established in 2005 that primarily acquires, renovates and manages value-add real estate properties. It currently has acquired 84 properties with $1.8 billion in total acquisitions. You can contact him at firstname.lastname@example.org.