Multi-Family Investments on Pace to Beat Pre-Recession Levels

Demand for multi-family housing has boomed recently, as consumers are more likely to rent after the Great Recession than before it. This is largely because the financial impact …

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Demand for multi-family housing has boomed recently, as consumers are more likely to rent after the Great Recession than before it. This is largely because the financial impact of that downturn has made it harder for them to return directly to the home ownership market. Some investors are turning to multi-family properties to capitalize on this rising demand. 

A surge in multi-family construction has powered solid gains in home building through October. A recent U.S. Multi-family MarketView report by CBRE, a global real estate firm, predicts investments in multi-family properties in the U.S. in 2014 could break a pre-recession high, indicating investors are confident in the state of the market and demand for buildings like apartments. The report said multi-family investment could be more than $105 billion, the record established in 2007

"Multi-family continues to lead commercial real estate through the recovery and into expansion," said Brian McAuliffe, senior managing director for multifamily at CBRE Capital Markets, according to Real Estate Weekly.

McAuliffe identified three trends that characterize recent investment activity. 
  • More private, non-institutional buyers are accounting for a greater share of total investment activity
  • Foreign capital is playing a larger role than it historically did in multi-family property investments
  • Real estate investment trusts are playing a less active role in multi-family property investments

Downward pressure on cap rates and increasing sales prices per unit reflect the large volume of capital committed to the sector, as multi-family investors continue to have a favorable view of this asset class. The average apartment sales price per unit was $128,000 in Q3 2014, representing an increase of 5.9% over the prior year.

What’s Driving the Multi-family Market Surge?
 
“That’s where all the demand is,” said Jed Kolko, chief economist at real estate website Trulia. 

"Nearly all of new household formation right now is renters. Young people are starting to move out of their parents’ homes, and both young and older adults are having a hard time buying houses."

The CBRE report identifies several other factors helping to drive demand. With the labor market strengthening and income growing, there is greater potential for the release of pent-up household formation. This could keep demand and rent growth at their current pace through 2015. A focus in the report on the Miami market, for example, showed that strong demand for apartments has outstripped supply since 2008, resulting in a low 2.4% vacancy rate in Q3 2014 and record-high monthly rents.  
 
Other market areas are showing similar growth. USC’s Lusk Center for Real Estate predicts that average rents across Southern California are projected to grow 8% over the next two years
 
As investors often consider expanding their portfolios with multi-family properties because they bring in more monthly revenue and reduce the cost of maintenance compared to single-family homes, the competition for properties is also growing fiercer. 

In the third quarter of 2014 alone, multi-family sales volume jumped 28 percent from the same period last year to reach $27.5 billion, World Property Journal reported, citing the findings of the CBRE report.

Future of Multi-family Investment

Both investors and borrowers are likely to see rising investment opportunities in multi-family housing with this potentially record-breaking year. 

“Consistent with the robust sales activity, we continue to see strong lender demand for multi-family loans,” said CBRE Capital Markets Senior Managing Director Peter Donovan. “As a result, borrowers are seeing increasingly more attractive debt terms with respect to pricing and interest only. The lending market continues to show underwriting discipline with respect to proceeds and structure.” 

Crowdfunding companies have brought to accredited investors opportunities in commercial real estate, like investments in larger multi-family residential properties, many of which may not have before been accessible to such investors. 

Realty Mogul offers equity securities through WealthForge, LLC, member FINRA/SIPC
 

IMPORTANT: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Hyperlinks to sites outside of this domain do not constitute an approval or endorsement of content on the visited site.

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