U.S. Multifamily Investments – Will The Bulls Keep Charging?

Why the U.S. Multifamily market will keep growing in the near future?

The U.S. real estate market has enjoyed steady growth since the recession and is attracting investors from four corners of the earth. The above raises a very valid question with regards to current investments in U.S. real estate and it is whether after almost a decade of growth isn’t it time for the market to cool off? If so, wouldn’t a smart investor be better off waiting until the tide turns and prices go down?

Indeed, the U.S. market is the largest and strongest in the world and since there aren’t that many investment alternatives out there that provide a decent risk/reward profile, the market keeps charging ahead but all good things must come to an end, mustn’t they?

If so, where is one supposed to deploy one’s portfolio allocation to real estate?

Well, as far as U.S. multifamily investments are concerned this end seems to be distant. A few “fun facts” to remember [1]:

  • The U.S. needs to construct an additional 4,600,000 apartments by 2030.

  • The demand is coming from various sources: millennial's (who delay their marriages and family creation towards their very late 30s); empty nesters/baby boomers who got sick and tired of paying mortgages and property taxes and prefer to forego the “fun” of doing projects around the house every weekend; natural population growth and immigration

  • At the moment, roughly 38.8 million people live in apartments, and the trend is on an upward trajectory as the population is expected to grow by 9.79% by 2030 and the demand for apartment living within the same time frame is expected to grow by 20.4%.

  • Yet, the pace of construction lags the demand by approx. 100,000 units/annum which means that the above inventory deficit is only going to increase with no apparent solution.

  • Add to that above the fact that over 50% of the apartment inventory was built before 1980 and needs various levels of renovations in order to stay in business and you get a close to “perfect storm” for apartment investors.

Indeed, not all markets have been created equal as the propensity to rent is on an increased level in high growth and high cost states as well as in border states (e.g. in Texas the demand for apartments is expected to grow by almost 32% by 2030; Georgia 31%; South Carolina 25; North Carolina 37%) however even within the markets that have grown more than others construction and land costs are on the rise which reduces the returns on investment in new construction projects.

Additionally, most often than not, the older properties are better located than their newer counterparts and are situated in more mature and stable sub-markets which in turn reduce the risk associated with investing in them without reducing the returns either on current cash flows or capital gains.

That said, if one is to opt into investing in the older properties it is imperative to invest with a sponsor who has ample experience in value add properties as the success of these projects/investments will rely heavily on the sponsor’s ability to execute the value add program and stabilize the asset as a higher quality asset with a better market positioning. In such cases the sponsor’s ability to renovate the apartments with minimal impact on occupancy and rent levels; its ability to streamline expenses and augment Other Income sources becomes even more crucial.

More so, that experience and expertise are required when selecting the right investment property as here come into play strong demographic considerations either before or after the value add program has been executed as well as the ability to identify a property that is truly a value add candidate rather than merely an advertised one.

The U.S. Multifamily sector will continue to grow if only for the simplistic reason that has been valid since we were all cavemen – everybody has to have a place to sleep and when there are more and more of us there will be more and more demand. How you choose your cave and what mural you will paint on it, is increasingly becoming the realm of the experienced professional and an investor is strongly advised to deploy his portfolio allocation with such a professional.

[1] https://www.weareapartments.org/data


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