Multifamily Investing — Is this the Market Bottom?

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Former Fed Chairman Alan Greenspan said that  he believes a bubble in the commercial real estate market has already popped in a recent interview with ABC Senior White House Correspondent, Jack Tapper.  “Real estate prices are down 50%. With prices already down and adjusted, if we were going to get severe secondary reactions, they would have occurred, and they would have occurred if it weren’t for the fact that the rest of the economy is showing some degree of buoyancy”, Greenspan said. 

If you ask a dozen real estate analysts about the state of the U.S. real estate market you are likely to get a dozen different answers.  Because real estate is fundamentally an area of economic s that is essentially a group of diverse of sub markets and different regional areas it is reasonable to assume that when there is a recovery that certain markets will recover faster and sooner than others.  This is also true for the different property classes within commercial real estate. 

The Mortgage Bankers Association recently published their Commercial Real Estate/Multifamily Finance Quarterly Data Book for the fourth quarter of 2009. If the reader carefully studies the graphs, charts and statistics inside of the report they can begin to extrapolate which property types and  which geographic regions will see a recovery soonest.   

According to the MBA Report, “average vacancy rates increased for each of the major property groups, rising 4.5 percentage points (to 19.2 percent) for retail properties, 2.9 percentage points (to 19.7 percent) for office properties, 2.7 percentage points (to 13.2 percent) for industrial properties and 1.4 percentage points (to 8.6 percent) for multifamily properties.”  Details of the vacancy rates for different commercial property classes can be seen below:

In my opinion, the two most important sets of data that the individual apartment building investor should consider when investigating the timing of a purchase are the geographic area’s supply of rentable apartment units and the unemployment rate for the area.  The MBA Report correctly states that  “Job losses and consumer restraint have had a marked impact on demand for commercial real estate space.”  This is especially true for the multifamily sector of commercial real estate.   In those areas of the country hit particularly hard by the recession, such as Detroit Michigan, apartment building vacancies have reached record highs.  Many new investors may be tempted to invest in these hard hit regions by what look like great deals on paper because of depressed prices.  As I discuss in detail in my investment education courses,  it is extremely important to buy apartment buildings in areas that have a consistent track record for low unemployment.  For example, Washington DC right now has not seen as large a drop in employment as many other major cities. 

The most interesting information for apartment building investors contained in the MBA Report is the chart below that shows construction starts for multifamily buildings from 1968 to the present.  The chart clearly shows that the last two years have seen the smallest number of multifamily building constructed in the past 40 years.  The causes of this slowdown in construction are closely tied to lack of investment capital available to multifamily developers and the fall in commercial real estate prices.  It is important to note that even as multifamily construction has slowed to a trickle population levels in most urban centers are continuing to grow.  These new families will need housing and for many of these people the clear choice will be apartment living.  It is very conceivable that in the near future as the overall economy improves and more jobs are added that many urban centers will see a shortage of multifamily housing.  This shortage should increase occupancy levels and lead to higher prices or returns for those apartment building investors who do their homework and invest in the right location at the right time


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  1. Craig Grella on

    GREAT article. Finally someone who mentions supply and employment in the same conversation as potential investing. It always surprises me when investors pass up researching those two issues for MF purchases and developments, especially in areas where the investor doesn’t live or work.

    I think if MF investors took the time to learn how local employment relates to supply and demand they’d have a much better understanding of the real estate market, and how to price it.

  2. Good article Ted. I have to agree with the article on the multi-family housing seeing a shortage in the near future. Here in San Antonio we’ve seen many apartments go up, but no duplex/quad-plex units. Only time will tell.

  3. This blog post has open my mind to considering multifamily investing. I have not really looked in that market but after reading this it sound like a really good idea. Good content I am glad I came across it. Thanks Adam

  4. Hello Mr. Ted, I’ve being reading several of your articles and have not found any thing regarding being an owner/operator for an apartment building. I would really like to live in it and manage it myself, something small, about a 10 unit building. My main concern is that, are their any laws or regulation against owner/operators living with in the complex that I should know of. My home state is Texas. Any other information will be greatly appreciated. Thanks

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