Michael H. Zaransky is Founder and Managing Principal of MZ Capital Partners, an award winning multifamily investment and development firm.
getty
Any discussion of multifamily real estate’s resilience during rugged economic times begins with a very basic fact: People must have a place to live. That also happens to be why the sector has been able to provide shelter for investors looking for a safe haven now, with inflation running rampant.
A Need-Driven Asset
Obviously there’s more to it than that, but that’s where we begin: Whether the economy is good or bad, there is always a demand for housing. Veena Jetti, founder of the multifamily investment firm Vive Funds, called apartments “a need-driven asset” in a July 2022 post for Forbes, and pointed out that the price of single-family homes (not to mention skyrocketing interest rates) put such dwellings out of reach for a certain segment of the U.S. population.
Paul Kaseburg, CIO of San Diego-based MG Properties, also addressed what he labeled as “the affordability gap” in a June 2022 podcast, noting that home prices had risen far faster than personal incomes, causing many people to be renters “by necessity.” That trend has continued for the rest of 2022, with personal incomes up 6.0% in Q3 (the most recent numbers available), but home prices rising 8.6% in that same quarter. The interest rate on 30-year fixed mortgages, meanwhile, has risen over 3% since January.
Mohsin Masud, CEO of the real estate investment firm AKRU, likewise settled on necessity as one of the four keys to the sector’s strength—the others are, in his estimation, affordability, efficiency and liquidity—and pointed out that at the height of the pandemic, occupancy rates “stayed relatively stable when compared with office or certain types of retail properties” (subscription required).
Demand, in fact, outstrips supply by some 600,000 units nationwide, according to the National Multifamily Housing Council and the National Apartment Association, a gap that is only expected to widen. Renters, meanwhile, continue to pay rent on time; RealPage reported in July 2022 that rent collections held steady at between 95% and 96%, despite the disruptions of the past few years. Figures that track industrywide rent levels show an overall slowdown in rent growth over the last quarter from previous record levels. While most markets have cooled down to pre-pandemic typical 3% to 5% annualized rent growth levels, some markets are experiencing asking rent level reductions.
All this occurred as inflation, which averaged 3.8% between 1960 and 2021, rose above 8% for seven months in a row in 2022. By October, gas prices were up 17.5% compared to October 2021, while grocery prices had risen 12.4%.
Real Estate In A Cooling Economy
Inflationary environments are often favorable for multifamily investment. While cost of operations increase, rents and other revenue often rise more than enough to cover increased costs and result in increased net operating income (NOI) and cash flow. Additionally, higher consumer mortgage interest rates increase the number of renters in the market by reducing people’s ability to purchase a home.
Kaseburg noted on the aforementioned podcast that when the economy sags, the multifamily sector “doesn’t drop quite as far, and then, as it recovers, it recovers faster.” One of the major reasons for that is that lease rates can be reset as often as every 12 months, while leases for other property types tend to run far longer.
Not to be forgotten, either, is the fact that there is greater liquidity in the sector—meaning it is far easier to secure a loan for an apartment building in the current climate than it is for an office building. Many of the latter were left unoccupied as remote work became the norm during the pandemic, and remain so.
Moreover, there are tax benefits to take into account. Particularly notable is the 100% bonus depreciation on qualified property made available through the Tax Cuts and Jobs Act of 2017. It will begin phasing out at the end of 2022 and expire in 2026.
There are, of course, caveats. With the costs of building materials like lumber, steel and asphalt on the rise, multifamily owners have had to do some belt-tightening. Jetti wrote that this means nixing cosmetic projects, revisiting contracts with vendors and resorting to expense-control software in order to make sure bills are paid on time.
She added one other factor, echoing the location-location-location mantra that has always been at the heart of every successful real estate strategy and remains important. Given an accelerated jump-start during the pandemic, suburban apartment rents have remained strong with a growing number of the apartment renter population leaving cities’ urban core to seek more open space, larger floor plans and quality school systems. Additionally, the “new normal” of hybrid and remote work means workers need not live near the now partially empty office towers in major metropolitan areas.
Final Thoughts
I conclude that the multifamily sector remains as resilient as ever: It came through the pandemic unscathed and appears to be no less resilient in the face of the inflationary period in which we now find ourselves. As mentioned above, this begins with the fact that people always need to have a place to hang their hats. That is immutable, and bodes well for all those associated with the sector.
Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?
