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Multifamily Real Estate: Why We Are Bullish During a Quiet Market

hamilton-zanze January 03, 2024
Market Commentary Article
Springfield Apartments. Murfreesboro, TN Springfield Apartments. Murfreesboro, TN
2023 has been a challenging year for multifamily real estate. But make no mistake: investing in multifamily properties can still be a powerful vehicle for building wealth.

In the midst of economic uncertainty and a slew of new apartment homes coming online, rent growth has softened. Nationally, rents increased by only 0.1% on an annual basis in October, according to RealPage.

Rising interest rates, the increased cost of capital and the gap between buyers’ and sellers’ expectations have stalled multifamily transactions. In the third quarter, multifamily investment sales totaled $30.1 billion, representing a nearly 62% decrease from the same period in 2022, according to a report by Newmark Group.

Given the current economic and interest-rate environment, investors considering multifamily might be tempted to place their dollars elsewhere, such as CDs or Treasury bills. However, now remains a good time to incorporate multifamily into an investment strategy. Consider the following reasons.

Long-term fundamentals remain strong. Yes, the market has seen an infusion of new supply (1.2 million apartment units over the last three years, according to Yardi Matrix), but that should begin to taper in 2025, according to analysts, because of today’s tighter lending environment and rising construction costs. In addition, home affordability remains a challenge for many potential homeowners, causing them to stay in apartments longer.

Tax efficiency. Over time, those who invest in multifamily real estate can defer and optimize the taxes paid on investments through 1031 exchanges, pass-through taxation, depreciation deductions and estate tax planning. Also, over time, multifamily assets can provide consistent income through tax-efficient distributions and long-term capital appreciation.

Portfolio diversification. Multifamily has a low correlation to stocks and bonds, adding diversification. Investing in a fund that owns a large amount of properties brings its own kind of diversification, because the number and variety of assets can minimize the impact of distribution reductions or suspensions that can occur with single-asset investments.

A couple of other thoughts as 2024 arrives:

  • Investors should make sure they’re investing in apartments located in markets characterized by robust job growth, a diverse economy and a business-friendly environment, as well as critical institutions like government, healthcare and education. We believe suburban infill locations most often fit this description. These areas are also seeing a rise in build-to-rent developments and more apartment homes for the “missing middle” of income earners.
  • It is important that multifamily investors put their money with sponsors who are proven and experienced. Sponsors with property management expertise can maximize property value, NOI and investor returns by implementing operational efficiencies, capital improvements and sustainability measures. By contrast, the wrong sponsor can deliver poor results even when a property is surrounded by favorable market conditions.

Looking ahead, we believe 2024 will be a good time to invest in the apartment market. While various factors and media headlines may continue to cause some to pause, individual investors would be wise to look for opportunities to either enter multifamily or expand their portfolio. By doing their research to find the right sponsor/partner, these investors can position themselves to create durable wealth for themselves and their family members.

An old saying in investment circles says something along the lines of, “Be cautious when investors are being aggressive and aggressive when they are being cautious.” In 2024, those looking to grow their wealth should take a good look at multifamily.

 

This article originally appeared in Wealth Management’s 2024 Market Outlook with the title “Multifamily Remains a Strong Investment”.