Best in Class: The Surprising Appeal of Multifamily
Long considered the “darling” of commercial real estate, multifamily has been a consistently strong asset class and shows healthy fundamentals heading into 2018.
Since the depths of the financial crisis, in which average multifamily cap rates rose to around 7.5 percent, the broad multifamily market has seen steady drops in vacancy, increases in average annual rents and relatively low volatility. With average cap rates today hovering around 4.3 percent, multifamily remains one of the most attractive areas to invest in commercial real estate.
While each asset class comes with its own risks and rewards, multifamily offers compelling advantages for both individual and institutional investors.
- Baseline Level of Demand: Regardless of the state of the economy, people need a place to hang their hats. This creates a baseline level of demand for most multifamily assets. According to Yardi, the national occupancy rate for stabilized multifamily assets closed out 2017 at just over 95%.
- Diversified Cash Flow: Multifamily properties produce monthly rents, with the risk of default spread among multiple tenants. A single tenant represents a relatively small percentage of overall income, and minor changes in occupancy should not significantly affect cash flow.
- Economies of Scale: Overall management and maintenance costs are more efficiently shared within multifamily properties. When multiple units are located under one roof, certain operational costs—like those relating to security or overall upkeep—are reduced.
- Diverse Financing Options: A number of financing options exist for multifamily developments, including loans from government-sponsored enterprises like Freddie Mac and Fannie Mae. These programs enhance the availability and reduce the cost of credit for qualifying multifamily projects, increasing the efficiency of the capital markets for such housing developments.
- Less Competition: Due to higher barriers to entry, including overall higher sales prices, multifamily properties are often less popular among investors than single-family homes. This limited competition can make it easier to find high-quality assets in the space.
Many commercial real estate investors seek assets that have the potential to appreciate over time. In today’s market, this type of opportunistic investment strategy is often centered on stabilized multifamily assets. While some observers continue to look for signs of peaking rents or oversupply, investor interest remains strong for multifamily assets and has expanded into a number of suburban, secondary, and tertiary markets across the U.S.
At RealtyShares, multifamily projects are at the core of our range of offerings. In 2017, we helped finance more than 80 multifamily properties from Miami to Phoenix, and we recently announced a new partnership with Airbnb to bring much-needed financing to the multifamily home sharing sector. Every project is subjected to an extensive due diligence process by our experienced team to ensure that it is properly vetted and meets our rigorous standards.