Part 1: Investing in Multifamily Real Estate

Since the economic downturn in 2008, multifamily housing has represented the most attractive area of commercial real estate investing. The first signs of recovery coming out of the recession were in multifamily housing, initially in underlying fundamentals and then in investor dollars. While office space and other commercial property experienced increased vacancy rates during the downturn, multifamily housing remained relatively stable. It’s no surprise of course that this sector would lead the recovery, given that regardless of the health of the economy, people need somewhere to call home. Particular attributes investors also like include:

  • Diversified Cash Flow: these properties produce monthly rents while also spreading the risk of default amongst multiple tenants
  • Economies of Scale: management and maintenance costs are more efficiently spread between multiple units in one location
  • Less Competition: multifamily properties can be less popular among investors than single-family homes, for myriad reasons including higher purchase price, making it easier to find high-quality assets

Given that the population growth has not slowed, vacancy rates have hit record lows and the strongest markets have experienced healthy increases in rental rates over that same period. This might lead you to think that new development is booming, right? While investor interest ramped in the sector, according to Freddie Mac, new construction remained a scarcity until 2012 in most areas of the country. Even with the resurgence in multifamily development, new starts are still significantly below the average of 260,000 units / year over the last two decades.

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The combination of these attractive characteristics has led to tremendous investor interest in the multifamily housing sector, with CoStar estimating total U.S. multifamily deal volume hit $88 billion in 2012, a level not seen since 2007.

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As you might imagine, this increased demand for good product has led to a corresponding compression in cap rates,moving down from 7% to 5.3% YTD in 2013.

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Investing today naturally means thinking about tomorrow though. With the natural lag between start and completion of new multifamily development projects, many of which are enormous and require years to take from entitlement to finished product, inventory will remain relatively stable in the next few years. As a result, multifamily investments should continue to experience favorable vacancy rates. Rental rates may have hit peak levels in top metro markets such as New York City, San Francisco and Boston, but according to REISopportunities still exist in major cities around the country such as Dallas, Phoenix and Charlotte.

The challenge, as we at RealtyShares see it, is avoiding compressed cap rates and investing in areas with further potential for rental rate growth. So how do you find a great multifamily investment opportunity? What should you look for in a good multifamily housing investment? We’ll be writing about that next week!