The Future of Multifamily Investment

A recent report from Integra Realty Resources cites continued optimism for the apartment sector as rent growth and investor interest are expected to increase.
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Multifamily investment is exploding across the South and Western United States, particularly in suburban areas of Atlanta, Dallas and Phoenix, where garden apartments are plentiful. Mid- and high-rise multifamily assets are also selling in Manhattan, Seattle and Los Angeles, but Integra Realty Resources’ 2020 Viewpoint Multifamily Report notes that tertiary markets are the biggest beneficiaries of the search for yield.

“There is continued optimism, rent growth and investor interest in the multifamily sector, particularly in tertiary markets,” IRR CEO Anthony Graziano told Multi-Housing News.

Citing Real Capital Analytics, the report states smaller metros, those below the top 50 markets in size, accounted for $27.7 billion in apartment property deals through November 2019. The report also notes that with the exception of the Central region, all parts of the U.S. are increasing multifamily acquisition volume. The flow of funds in 2020 is expected to continue at a high level.

“The multifamily market velocity over the past few years has been tremendous. The overall trends have been and remain very positive,” Graziano told MHN. “This is due in part to some of the demographic changes we’re seeing. The younger, millennial demographic isn’t buying single-family homes like previous generations. They’re delaying decisions to get married and have children and instead are opting to stay in apartments longer.”

The multifamily report said macro forces are also shaping the demand side for rental housing. It states about 35 percent of U.S. households are renters, or approximately 45 million households. The report notes rental house construction has slowed with about a 1.2 percent increase in supply, or about 360,000 new units, hitting the market by the end of 2019.

What are being developed are often highly-amenitized buildings in downtown areas, resulting in a shortage of mid-­market and affordable housing. While there are some markets that will see rent leveling off or decreasing due to new supply coming online, IRR notes the national average for rent growth is expected to be steady at about 2.2 percent. Rent growth is expected to be strongest in the West and South regions with the East and Central regions seeing increases at roughly 2 percent. IRR also points to more aggressive rent regulations that are increasing in parts of the U.S. due to both tenant activism and widespread concerns about homelessness.

Who’s Buying?

The long bull market in the multifamily sector means there are tremendous profits for sellers, a factor that is also fueling transaction volume. A look at the buyers last year found that nearly two-thirds of the acquisitions were made by private equity funds managed by major firms like Blackstone, Goldman Sachs and Bridge Investment.

Institutional investment managers like Brookfield, TIAA and Invesco were also buyers with their investments totaling about 22 percent of the market share and cross-border investors accounting for about 7 percent of the deal volume. IRR stated that REITs like BREIT, Equity Residential and UDR were also taking some of the market share from the institutional and international buyers.

The report states few of IRR’s survey respondents expect further cap rate compression in 2020.

“We haven’t seen a big jump in cap rates because there’s a lot of investment money and interest. A lot of investors believe multifamily is the safe haven of all the commercial real estate classes,” Graziano said.