Emerging Opportunities for Multifamily Investors

Drake Ayres

The rising cost of homes is keeping the homeownership dream at bay for many Americans. Demand outweighs supply, inflation persists and additional potential interest rate hikes loom—three key factors forcing many would-be buyers back into renting. Despite consistent demand for multifamily units however, issues are challenging the apartments sector, particularly within the affordable and workforce multifamily asset classes where demand far outweighs supply. Yet because of these very headwinds, investment opportunities that support the housing of lower income Americans have emerged.

Lower income renters arguably face the worst challenges in securing housing. This cohort is cost-burdened, with some forced to apply more than 50 percent of their income toward rent. A key cause is wages. The federal minimum wage has remained $7.25 per hour since 2009, despite raging inflation. Yet the National Low Income Housing Coalition reports that the national housing wage—the hourly wage full-time workers must earn to afford a rental home at HUD’s fair market rent without spending more than 30 percent of their incomes) is $25.82 per hour for a modest two-bedroom rental home and $21.25 per hour for a modest one-bedroom rental home.

Exacerbating the issue is the country’s current shortage of 7.3 million workforce/affordable and available rental homes needed to meet the needs of low-income renters. This void is impacting every single state and major metro region. Queues among renters for workforce and affordable rentals remain lengthy as a result.

Of course, the multifamily sector at-large boasts strong underlying fundamentals and, as CBRE reports in its U.S. Real Estate Market Outlook 2023, an average annual total return of 9.3 percent over the past decade. Multifamily benefits from the ongoing support of GSEs Freddie Mac and Fannie Mae—two significant debt sources that are notably unavailable to other commercial real estate asset classes. These advantages have historically made multifamily, and even more so workforce and affordable rentals, among the best categories of real estate for hedging inflation-related concerns.

It’s true that the industry must find ways to solve for the lack of supply, including identifying and providing incentives and initiatives that will kickstart new construction of workforce and affordable units. That said, providing finance for existing units is also paramount to preventing current supply from decreasing any further. With many of the lenders who serve this sector (a significant number of which are banks) now on the sidelines waiting for economic conditions to improve before they start lending again, Freddie Mac and Fannie Mae are left as the primary providers of finance and refinance solutions for workforce and affordable apartments.

Both Freddie and Fannie are mission-driven, committed to providing liquidity to the industry regardless of economic conditions. Supporting these agencies with solutions thus will not only help to keep existing supply healthy and available to lower income renters, but it’s also a promising investment opportunity today, since workforce and affordable rentals typically outperform other types of commercial real estate during downturns.

Join the Mission

One of two attractive opportunities in this arena today is investment in mission-driven, agency-quality B-piece securities. Freddie Mac and Fannie Mae require the certainty of mission execution in order to continue to provide liquidity in the affordable rental housing arena. As such, they require long-term partnerships with proven investor partners who participate in B-piece investments. Because the agencies are committed to providing liquidity, even during periods of economic uncertainty, these investors are provided with a continuous flow of B-piece product whose credit quality is enforced through agency credit standards and performance.

Another opportunity present today is investment in bridge-to-agency loan programs and partnerships. Loan programs serving borrowers with bridge financing for affordable multifamily properties with near readiness for agency Freddie Mac or Fannie Mae financing provide a critical solution in the marketplace. Property owners are supported with short-term capital for fast closing while they complete the necessary initiatives (minor to moderate rehabilitation, repositioning, etc.) that will ensure the permanent agency finance they require is ultimately secured. Additionally, the lenders able to provide bridge solutions for rental properties destined for permanent agency financing are in a powerful position in today’s marketplace.

While these investment opportunities won’t solve the complete affordable housing crisis on their own, they are in fact necessary components to the support and recovery of the sector. They also provide opportunities to invest in assets that abate inflation and interest rate concerns, as well as drive value as counter-cyclical strategies. Of course, participants in these strategies will require a well-capitalized partner with the infrastructure and agility to execute quickly, as well as established relationships with the agencies —a position that is notably rare and extremely valuable today.

Drake Ayres is managing director for Sabal Investment Holdings, the real estate investment management firm serving institutional investors.