The apartment sector is one of the most actively traded sectors in real estate, pushing past office buildings in the third quarter of 2018. Apartment investments offer owners a stable, diversified portfolio and high and consistent cash-flow yields compared with other commercial real estate sectors.
The apartment sector is compelling for a wide variety of reasons, which are explored in a new report from CBRE and Bay Area investment firm Hamilton Zanze. The paper looks at the top reasons individual investors should get into multifamily real estate.
Here are five of the top highlights:
1. Renting's Continued Popularity
Today's millennials are still likely to rent rather than own, especially the younger ones. Plus, Gen Z is just starting to enter the market as a new renter pool. Baby boomers, too, will continue to drive demand for apartments, due to lifestyle changes and “downsizing,” opting for rentals in retirement.
Homeownership rates are still down from pre-recession levels, and CBRE and Hamilton Zanze expect any upward movement to be modest. In 2017, homeownership rates were 32% among 25- to 29-year-olds and 46% among 30- to 34-year-olds, well below the national average of 64%, indicating that many young residents will remain renters. This decline in homeownership is due to increasing levels of debt (student loan balances held by those ages 30 and younger have ballooned by more than one-third over the past 10 years, according to the Federal Reserve Bank of New York), hindering young people from saving up for down payments or qualifying for mortgages.
2. Significant Pent-Up Demand
Since the Great Recession, the number of financially burdened young adults living at home has increased. As the economy moves toward full employment and wages increase, it's anticipated this pent-up demand could translate into over 3 million to 4 million additional renters. Meanwhile, the annual new-apartment supply averages only around 325,000 units.
3. Favorable Performance in Economic Downturns
Apartments tend to remain stable during recessions compared with other property types, and the sector is less sensitive to changes in economic activity. Apartments have a much shorter leasing cycle, one year, compared with four to seven years for other major property types, making them flexible and able to adjust more quickly to changes in the market cycle.
Apartments tend to have lower capital-expenditure requirements and lack the tenant improvement and leasing commission requirements of other property types. Therefore, a higher proportion of net operating income is distributable as cash flow, and the yields are generally higher and more stable than for other property types over the long run, according to CBRE's data.
Apartments also tend to recover more quickly than other property types as the economy emerges from recession. According to the Real Capital Analytics (RCA) Commercial Property Price Index (CPPI), core commercial property fell 36.6% during the global financial crisis and it took 78 months for full recovery, while apartment values fell only 32.2% and took just 47 months to recover the loss.
4. Favorable Performance in Both Stable and Rising Interest-Rate Environments
If interest rates remain low, apartment investors are likely to continue to benefit from low financing costs. Apartments have benefited from financing rates that have averaged more than 48 basis points lower than those of commercial property over the past 10 years, according to RCA. Apartment investors may also benefit from higher interest rates, as apartments will serve as an effective inflation hedge. Over the long term, apartment rents have tended to outpace overall inflation rates.
5. Location, Location, Location
In this cycle, a large share of new apartments has been constructed in urban markets with a high concentration of Class A development. While this asset type is in demand, developers have also overlooked prime suburban areas.
Many "renters by necessity" will continue to fuel demand for suburban product and are looking for apartments in select, well-located, suburban areas with quality transit, amenities, and school systems.
Suburban rent and occupancy performance have outperformed that of downtown areas, says the CBRE/Hamilton Zanze report. Investors continue to acquire apartments at more favorable initial acquisition yields, or cap rates, in the suburbs. According to the CBRE Cap Rate Survey, the national average suburban, Class B cap rate is 5.41%, while the comparable cap rate for infill locations is 5.14%.
Multifamily Executive 5 Reasons to Invest in Multifamily Hamilton Zanze and CBRE on the many benefits the apartment market has to offer buyers. By Lauren Shanesy
Read the article on MFE's website HERE
Yes, apartments are still a good investment, but for more fundamental reasons than during the past eight years. What I mean by this is apartments have always been a good investment. Unlike other commercial real estate investments, apartments are tied much more to residential trends and demographics. Starting in 2010 and continuing through early 2018, the fallout from the crash and recession created an imbalance in homeownership that gave rise to an increase in apartment rental rates. The rent increase directly correlates to an increase in the value of apartment buildings. But apartments are still a good investment for traditional reasons versus heavy appreciation, even with changing circumstances such as rising interest rates, rising property taxes and a potential recession. If investors focus on property fundamentals, hone their investment strategy and conservatively underwrite for today’s market, apartments are still a high-performing investment in 2019.
A normalization of value appreciation in apartments is usually related to a projection of flatness in net operating income (NOI). Historically, flatness of NOI is anticipated when two primary drivers occur: rent softness (meaning rents are not growing well) and anticipated interest rate increases. The current market seems to have both of these factors. Current rent softness comes from years of rent growth and a large supply of new construction units being delivered and a large supply of new construction units being delivered. Interest rates in Q4 2018 are higher than Q4 2017, and more increases are forecasted for 2019. Locally in Chicago, the third factor for NOI flatness is property tax increases, as city, county and state government continually raise taxes to increase revenue.
Focus On Fundamentals
For apartment investing, that’s the bad news. The good news is that if you focus on the fundamentals and invest for the long term, apartments are still the most compelling product type in commercial real estate. The key reason for this is simple, if trite: People always need a place to live. For investing in apartment buildings, remember three fundamental factors of location, value-add and underwriting.
Location is the primary factor for any real estate investment, but what makes a location good varies by product type (residential, industrial, office, apartment, retail, etc.). For apartments, good location usually means easy access to centers for employment and transportation (e.g., public or highway access).
Hone Investment Strategy
Value-add means ways to increase the value of your property. Increasing the NOI of the property despite the market in general projecting flatness for NOI is one of the best ways. The obvious is making physical improvements that result in higher rent (i.e., new kitchen cabinets). The less obvious maybe how to decrease expenses or create better operational efficiencies. Other ways to add value may have to do with overall returns over the lifespan of the investment. A trend right now for achieving this is investing in Opportunity Zones. These investments reduce or eliminate your capital gains, thus significantly increasing your overall returns.
Underwriting means carefully analyzing all of the income and expense related to an investment, including a conservative proforma of the changes expected, looking at financing options and determining what your return on investment will be at the purchase price being contemplated. Set a threshold you have to achieve and hold yourself to it. If your target is 10%, underwrite honestly and conservatively and do not invest if you cannot get the numbers to cross that minimum threshold.
Apartments remain a solid commercial real estate investment class — if not still the golden child. Getting back to the fundamentals described above should result in a long-term appreciating asset and a meaningful return on investment.
Read this article on Forbes HERE
L5 Real Estate Investments, LLC is a privately held investment firm focused on stable, income producing multi-family opportunities in emerging U.S. markets.