Multifamily is a Stable Asset in Any Economy

There are many reasons I believe multifamily complexes are the safest real estate asset to invest in. There is recorded data through recessions and depressions, including a recession brought on by a real estate crash in 2008-2010, that supports this belief. Shelter is a basic necessity. Along with food and water, we need it to survive. This true need is only part of the driving force that makes multifamily a great investment.

According to the U.S. Census, the absorption rate for apartments, which means how quickly new units are rented, is at the highest it has been in the past 3 years. One of the leading causes of this demand is the cost to own or rent a single family residence. According to FRED, Federal Reserve Economic Data, the median home price for the United States in Q1 of 2020 was $327,100. With homes in coastal regions nearing averages of $1.2 million. This is out of reach for many individuals.

One of the largest contributors to demand for multifamily housing are Demographic Trends

The 18-34 year old range is the largest generational demographic group and they are choosing to remain renters. This generation is often beginning life with too much debt to qualify for mortgages. Student loans are large for many people in their twenties and even thirties. While car loans and credit card debt also plague this generation, suspected to be fueled by growing up with the instant gratification of the digital world and the need to “keep up with the Jones’” on social media.

The retiring baby boomers are beginning to down size. Surprisingly, many of them are choosing to rent, pushing demand even farther. Immigration, which will account for about half of the U.S. population growth in 2020, also increases demand for rental units. Other trends that create high rental demand are the increasing age at which people are getting married and having children, both of these life events are often closely aligned with purchasing a residence. The natural migration of people, especially when a major employer moves to a new market. The nation is already experiencing large movement of people, with more expected, due to the Covid-19 crisis. Most natural migrations happen at a slower rate, giving investors of multifamily time to adjust their portfolios to markets of expansion.

Around most of the country there are waiting lists for affordable, workforce housing. This is the housing that many of the teachers, firefighters, police, and medical support staff live in. This type of housing is slightly older, nice, but doesn’t have top of the line finishes and amenities. The number of units being built in most areas of the country are less than the number of people moving to those areas. There is not enough housing supply to meet the demand. This is true in all but three markets in the United States as of early 2020.

Currently, the scheduled construction of new housing units, of all types, will not meet the needed number of housing for much of the country. With supply not reaching the demand needed, vacancy rates remain low. As long as the properties in your portfolio provide quality living environments, the ability to attract quality residents should remain stable.

This term is used to describe the evaluation of the financial and physical condition of the property to determine if it meets your investment goals and is a sound deal to purchase. Laws regulating loan requirements in underwriting were made stricter after the housing crisis in the late 2000s and have remained so. This prevents banks from over leveraging on properties or loaning on junk properties, which were the main causes of the financial crisis.

With the Covid-19 crisis, the two largest providers of multifamily purchase loans, Fannie Mae and Freddie Mac, have added even more requirements that may be here to stay. Depending on the loan amount and the loan-to-value ratio, large reserve accounts must be held by the lender that can cover the mortgage payments for the next 12 to 18 months.This further secures the property and creates a cushion of protection against unforeseeable events that cause a downturn in the market that could have an effect on the properties returns.

The FED has lowered interest rates to near 0% and anticipates the rates staying very low until at least 2022. This allows business to remain steady without the uncertainty of volatile interest rates that have been experienced in the past. Stability enables deal organizers to more accurately project what returns and property sale prices may be and structure a deal to provide the best returns to all involved.

It is very challenging to purchase large multifamily properties. Qualifying for the debt to purchase these buildings along with raising or having the funds for the down payment, closing costs and renovation/maintenance cost, greatly limits the number of people willing to put in the time and energy needed to enter this market class. It is also very challenging to build new apartment complexes due to zoning and other local government road blocks. The amount of knowledge, time, and experience needed to successfully manage a syndication further reduces the number of people willing to remain in the business. All this leaves those who are well seasoned, or those partnered and coached by the well seasoned, to dominate this business. The more experience, or team with experience, one has the higher the likelihood of the ability to navigate through tough times.

All of the elements of multifamily listed above keep the prices and values of quality properties in stable markets steadily appreciating, even through downturns in the country's economy. When this happens it allows the assets to have positive exchanges when sales take place. Care will always need to be taken when making an investment to ensure that the property is in a location and is of a type that is within your managing knowledge and matches your investment goals. When considering real estate, as a whole multifamily remains the class delivering consistent demand, appreciation and returns.

For graphs, charts and statistical data related to the safety of multifamily asset class in the 2020 recession see the article titled Stats, Graphs and Charts of Housing Market Strength in July 2020.