Investors looking for income generation, appreciation, diversification and other benefits often turn to commercial real estate. Physical properties tend to perform independent of the stock market and provide a hedge against inflation. Additionally, property owners can enjoy certain tax benefits, such as deducting interest expense on a commercial property loan and offsetting gains with depreciation.
For many individuals, multifamily properties arguably present the most accessible, relatable and rewarding real estate investment available. Everyone needs a home, after all, and owners generally have the ability to increase rental rates yearly as leases renew or residents turn over.
The pandemic raised the profile of multifamily properties: Not only were they essential, but they also displayed resiliency. During the height of the pandemic, for example, apartment landlords continued to collect around 93 to 96 percent of rent payments each month, according to the National Multifamily Housing Council’s rent payment tracker.
Many investors in retail, office and hotel properties, which continued to lag in 2021 because of the COVID-19 pandemic, have turned to multifamily assets. It is expected that 2022 will be another strong year for the asset class.
Fundamentals Drive Multifamily Investment
The growing interest in multifamily assets has ignited a surge in investment. Apartment sales were projected to reach $213 billion in 2021, which would be 10 percent more than sales recorded in 2019 prior to the pandemic, according to CBRE. The brokerage company anticipates apartment investment sales to climb another 10 percent to $234 billion in 2022.
Meanwhile, absorption trends signal continued strength as big cities make a return. COVID-19 exacted a heavy toll on the expensive urban gateway markets of New York, Los Angeles, Boston and Washington, D.C., as people moved out to the suburbs to work remotely. But with companies returning to work, renters absorbed 108,000 units in those cities through three quarters of 2021, an amount that bested secondary and tertiary markets, according to Yardi Matrix. Net absorption also turned positive for other markets that suffered heavy occupancy losses in 2020, including San Francisco, Seattle and San Jose, Calif.
The housing sector as a whole also remains woefully undersupplied to the tune of more than 5 million units. Moreover, those that want to buy homes are experiencing severe sticker shock: Annual home prices leaped an average of 18 percent in October, the highest recorded growth that CoreLogic has seen in 45 years. Zillow is forecasting an average increase of 11 percent in 2022.
On the rental housing side, supply chain constraints, labor shortages and high material costs across many markets are delaying the construction of multifamily communities. That’s contributing to the demand-supply imbalance and is driving rent growth. Multifamily rental rates grew 13.7 percent year-over-year in October 2021, according to Yardi Matrix. Those conditions, along with growing household formation and employment, have set the stage for continued rent growth and occupancy for the foreseeable future.
Despite signs of recovery in hard-hit urban and gateway markets in the Northeast, the most robust apartment rent growth is likely to occur in the West and South, predicts RealPage. Among other advantages, many of these markets offer affordability, enhanced privacy, mild climates and more living options, especially for millennials starting families.
Investors Choose Multifamily Real Estate as Inflation Spikes
In addition to the high demand for housing and strong fundamentals, multifamily assets can help investors mitigate the destruction of wealth caused by inflation. According to the latest data, the average apartment rental rate growth cited by Yardi Matrix in October was 7.5 percent points higher than the annual increase in consumer prices reported that month.
Historically, real estate and other hard assets have generated better returns than stocks and bonds during inflationary periods of both low and high economic growth. High inflation is generally considered unfavorable for bond investments because rising prices tend to eat into the purchasing power of interest, which is earned at a fixed rate. While some value stocks may outperform an increase in prices, inflation typically creates stock market volatility.
The inflationary environment is forcing the Federal Reserve to begin raising interest rates in 2022, and rising rates can increase the cost of owning real estate. But the multifamily financing environment in particular is awash in capital that needs to be put to work.
Lenders, therefore, may keep interest rates near their historic lows by narrowing the spread they charge above the 10-Year Treasury yield or other benchmark to compete for deals. Along with investor demand and growth in employment, wages, and household formation, competitive interest rates should continue to support multifamily asset values in 2022.
Adam Kaufman is co-founder & COO of ArborCrowd, the first crowdfunding platform launched by a real estate institution. In this role, he oversees the firm’s corporate growth strategies, including business development, digital technology, acquisitions and marketing and sales initiatives. Kaufman’s business philosophies stem from his family’s long and successful track record in all aspects of commercial real estate. He has leveraged that knowledge with his earlier work experience at one of the country’s leading digital marketing and technology companies. Marrying technology and real estate, he developed ArborCrowd to make real estate investing more accessible to a wider group of investors. Kaufman is a graduate of the University of Pennsylvania.