Unprecedented Structural Shift - The Thriving Multifamily Market

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Most of us on these forums strongly consider multi-family to be a solid investment, but not everyone fully understands why. On the other hand, many people have fears over a stagnating economy... We can only go this hard for so long, right? Well, it seems that at least in some aspects of investing, we certainly can. 

Below are the cliffs for an article regarding multifamily investing that I believe most people will find interesting, whether you're in San Francisco, Minneapolis, Chicago, LA, or virtually any other place with a multifamily infrastructure in place (and even SFR's, honestly, but this article focuses on multifamily properties), you will benefit from this information.


Keep in mind, however. Data and trends seem to be the new snake oil of the 21st century. As anti-intellectual as that sounds, it's easy to grab a set of data points to argue your point, while ignoring other contributing factors that may or may not fully justify the point you're trying to make. As such, I am not making any strong assertions, I just want to share the data with those that find it interesting or pertinent. One of the sources is at the bottom... I can't post more than one link. 

General Information:

  • Workforce housing offers steady income streams that adjusts with inflation annually. 
  • Interest in high-quality rentals is increasing across all price points and regions, indicating a well-diversified inventory.
  • Homeownership rate across all ages is near historic lows.
  • In half of all counties nationwide, it is now cheaper to rent than buy. 
  • All forms of housing assets report low availability and high pricing. 
  • Older adults are divorcing more frequently while younger adults are postponing marriage more than previous generations.
    • Both of these factors are positive indicators for the rental economy.
  • Wealth and income gains have not kept up with housing costs.
  • Wealth accumulation models seem to be changing; net worth is shifting from property ownership to defined contribution (DC) plans. 
  • Multifamily housing for low/median earners actually outperformed the overall multifamily market for four years straight.
    • Can be attributed to low vacancy rates and above-average rent growth. 


The Numbers:

  • Occupied US rentals rose by 20 percent above the prior 10-year period.
    • This growth is unprecedented. 
  • Student loan debt stands at $1.5 trillion, inducing an average millennial net worth of less than $0. 
  • Over the next decade, the US is poised to add more than 10 million new households.
  • 500,000 new rental households per annum through 2025. 
  • Total housing units in 2018: 120 million
    • 65% by owner (77 million)
    • 35% renter households (43 million)
  • Currently, 24% of U.S. renter households spend more than 50 percent of their annual income on housing. 
  • 30% are cost-burdened, according to HUD.
  • Approximately 13.5 million households are "renters by necessity".
  • Workforce housing (low/median earners) has brought in $375 billion in investment over the last five years.
    • More than 51% of the total for all multifamily asset classes.
    • Despite this investment, only a "small" amount of workforce housing has been built in the last 10 years, with investors usually opting for luxury rentals. 
  • Approximately 100,000 units are removed per year due to obsolescence - predominately workforce and affordable housing units.

Going forward:

  • Rehab and value-add approaches seem to be most favorable, particularly in high-cost and high-growth metros and submarkets. 
  • Entry-level rental housing will likely see the strongest growth as millennials leave their homes
    • 30% of millennials currently live with family, yet are the primary renter base. 
  • Large opportunity to provide quality, moderately-priced rental housing in densely populated areas. 
  • Low-cost rentals are largely unavailable, despite high-demand. 
  • There may be opportunity in rural areas, as well, to increase supply of moderately-priced housing due to high demand.
  • Rent growth is higher than income growth, which may present a financial limit to workforce housing cash-flow.
  • Overall, there's plenty of opportunity for both preserving existing and building new workforce housing. 

Thoughts?

NREI - Why U.S. Apartment Rentals Will Continue to be a Good Investment Choice


Fantastic information Ty! I favor multi family rentals over single family because every property experiences a vacancy at one point. You hedge your bets with multi family because the likelihood of all your units being vacant is low.

When a single family property is vacant not only is it not making money, it’s costing you money because of  scheduled monthly costs; water, insurance, utilities, mortgage, property management fees, etc.

Scale up with multi family , it’s the better play.

@Tyler Erickson

Thanks for sharing your thoughts and the article. Multifamily has and will continue to be demand. However it's important to avoid making an assumption that all markets are created equal and will continue to thrive. As you said yourself, there're plenty of other contributing factors when evaluating MFH (things like infrastructure, job growth, major employers, etc...) I like MFH due to the economy of scale. However when entering a new markets I always take the time to evaluate and sort of perform a "stress test" if you will and go over certain "what if" scenarios, especially when evaluating tertiary markets. 

So bottom line, each market has to be evaluated separately while taking into consideration the overall state of the market and the economy.

Thanks for organizing all that information and posting this, Tyler.  Multifamily (when bought right) is great to mitigate vacancy risks and really build long term wealth without taking all of your time.

@Tyler Erickson Thank you for pulling together all this data. That’s yeoman effort. 

The data you cite is why I’m very bullish long-term on apartments. Let’s be brutally honest here. The American standard of living is declining and poorer people don’t buy homes, especially when jobs are concentrated in expensive areas and NIMBYism prevents any low cost housing from being built near the jobs. 

Just because the long term fundamentals are there, however, does not mean that short term prices are justified. Prices are only somewhat related to fundamentals. Mainly they are a function of the availability of financing and investor sentiment, which have as much to do with psychology as anything. In every cycle, optimistic investors glom onto good news and use it to justify overpaying for assets, especially towards the end of the cycle, when you start hearing how “this time is different”. It was that way with tech stocks in 1999, houses in 2007, and now with MF rentals. 

The problem with a market that is supported in the short-term by investor and lender enthusiasm is that investor psychology tends to change on a dime to the downside. 

After a crash, investors are scared, and no amount of evidence about long term strength will move them into the markets. Most people only move when they feel it’s safe, and that only happens after they see the early movers starting to cash out. That’s why rallies take so long to build. Over time, more and more scared investors are drawn in by others’ success and strong FOMO. 

But rallies always over extend themselves, and when they do, sentiment can change rapidly. Rallies take a long time to build, but crashes happen overnight. In illiquid assets like real estate, a market can literally dry up and, no matter what appraisers say, your real value on an asset can be zero, because there are no buyers at any price. 

In my own investing, I prefer to be in a position where assets are cheap and long term fundamentals are good. That means reversion to the mean works in your favor and the wind is at your back. 

When long term fundamentals are good but asset prices are too high because of too much investor enthusiasm, then the long term fundamentals don’t matter that much. If you overpay, you are going to watch your asset values drop, and they might do so precipitously enough that when it comes time to roll over your debt, you find no takers without putting more equity into the deal to cover the loss. 

Sea levels may be rising long term. But that doesn’t mean that if you moor your boat next to the water line at high tide, it won’t be beached when the tide goes out. 

This is why I am a buyer. This is why Blackstone bought $900MM worth in Phoenix MSA in 2018. I am no Blackstone, but I bought $20MM worth in the last 6 months and will double that in the next 6 months.

my take on it is.. there is no way with materials labor and land and regulation in MOST markets to build new construction work force housing. 

And take South side of Chicago for example.. there are literally thousands of vacant MF buildings.. that you can buy for a fraction of what they would cost to rebuild.  and its hard to make sense of them in some instances because the amount of money to get them into service outstrips market rents.

And right now we are seeing in some markets rents are higher than mortgage payments.. and many developers doing A class up scale new apartments are seeing some stress as there rents are not achieving proforma.

Originally posted by @Tyler Erickson :

Keep in mind, however. Data and trends seem to be the new snake oil of the 21st century. As anti-intellectual as that sounds, it's easy to grab a set of data points to argue your point, while ignoring other contributing factors that may or may not fully justify the point you're trying to make. 

 I like that. I am gonna start using it. Big Data is a big business now. But what does one do with this data?

@Tyler Erickson Great information! Thanks for being transparent about the source of the data and any biases.

@Aaron Vaughn Absolutely. I agree completely. It's the rental unit version of diversifying your portfolio. It's weather/shock-resistant, especially compared to stocks. 

@Alina Trigub You're right about needing to avoid the assumption that secular markets will perform the same as the larger market that encompasses it. It's important to remember that larger trends can be indicative of what direction individual markets will take, but there are so many variables that affect the final outcome (whatever that may be). And usually, these properties are located within many markets. Regulations constrain markets, but they vary in size and can be contained within each other (federal regulations -> state regulations -> county regulations -> local regulations -> HOA's, for example). And of course, markets aren't only limited to their regulatory constraints, but they can be regional and so forth. So yes, I 100% agree with you that each individual property should be assessed prior to blindly trusting broader trends.

@Jonathan Twombly Much appreciated! 

Yes, absolutely. It's important to keep your feet firmly planted on the ground. That doesn't always mean pessimism, but it prevents overreaching or taking speculative risks. And yes, NIMBYism is horrifically ubiquitous, to be honest. Spot on. 

I also agree with your point about the psychology of investing. I studied economics and sociology and it's so interesting how tied together they are. In a very simple and reductive sense, stocks are a quantified analysis of the perspective people collectively have of the health of the economy (and individual companies). But for some reason, it's human nature to let the negative far outweigh the positive. If you asked ten people if your shirt looks good, 9 people could tell you look great but you're likely going to think about the one person that said it doesn't. This basic psychological behavior can be conflated and applied to many situations. Great point. 

Regarding crashes happening overnight... Do you see some value in the general appreciation that happens (usually), regardless of if there are buyers in the market at that given moment? In other words, I could buy an SFR, hold it for two years, then realize that there isn't a single buyer in my market for what I have to offer... Isn't there value in being able to hold it and maintain appreciation without losing the farm? Like what can happen in the stock market (and seems to do so every 10-15 years or so)? Granted, there can always be another 2008, but I'm just curious on your expansion on that.

@Ben Leybovich Amazing. Good for you! I'm looking forward to keeping up to date on your endeavors. I can't wait to be in the same position as you! 

@Jay Hinrichs That's very true. Materials, labor, and land are all going way up. The cash flow and margins dictate highest and best use most of the time for investors, so conservative builds don't happen as often as what would be "socially ideal". But there's a solution for every problem. Unfortunately, BP members aren't often in legislation and the seated legislators in large cities tend to have vastly different priorities than working to make affordable housing make financial sense to investors (compared to subsidization... And we all know how that goes). What class/areas are these apartments in? And what do you think is the greatest determining factor when it comes to getting them to cash flow? The cost of labor/materials? Regulatory measure protecting tenants?

@Paul B. It's huge. Many appraisers fear for the future because big data is slowly starting to replace the appraiser's opinion and legislative measures are following. Of course, I don't think it's nearly as dramatic as many make it seem, but it's still an important point of discussion. With enough data, aside from the physical inspection of a property and presumably the qualitative measures of a property, a relatively accurate algorithm can be produced to arrive at a value. Zillow currently does this and although it can be vastly inaccurate for many areas and properties, it tends to be relatively accurate in larger cities with simple structures that conform to the neighborhood. The range of estimated value tends to be tighter as the amount of comparables go up. It'll be interested to see what happens in the future, and that's only with the value side of things. Big data is going to take over our lives and in many ways, it already has. 

----------


Thank you for your input, everyone! I find your opinions invaluable. I haven't had a chance to enter the market as an investor yet, but these discussions give me a clear idea of what direction to head once I have the means. Thanks again! 

Originally posted by @Jeffrey Almonte :

@Tyler Erickson Great information! Thanks for being transparent about the source of the data and any biases.

 Absolutely. The source of the data is as important as the method of choosing what data is most important to present, which is a source of bias. I'm glad you found it interesting!

@Tyler Erickson The issue isn’t whether there are buyers when you want to sell. The issue is whether there are buyers when you have to sell.

Successful investors set themselves up so that they can sell when they want to, and not when they have to. 

Buying at the right part of the cycle and/or locking in long term debt increases your chances of exiting when it’s good to exit and not when it’s bad to exit. Doing both at the same time is even better. Needless to say, buying at the top of the market with short term debt and hoping the market will favor you when you must refinance increases your chances of disaster. And at the top of the market is when investors are often most tempted to do all the wrong things to increase returns to equity, such as too much leverage, short-term leverage, and massive and expensive rehab plans. 

For the purposes of this note being forced to refinance at a bad time is effectively the same as being forced to sell at a bad time. Indeed, the former often leads to the latter. 

Over the long run the world’s most successful investors are successful because they focus on minimizing downside risks rather than maximizing upside gains. 

Investors with good plans, bad plans, and no plans make money when markets are rising. It’s when markets are falling that the people who prepared for the downside survive and those who only think about the upside don’t make it to the next bull market. 

Long-term marriage breakup is up! Living in sin is up! Bright and shining future for rentals!

Just in case I had managed to con myself, even for an instant, that I wasn't banking on the continuing misery of the human condition.

@Tyler Erickson  Great share!

This is why we should always look for a robust cash flow in addition to value-add.

The magic of leveraging looks so good on paper that it is hard to resist the temptation of over-leveraging.

Get in with the premise that we should never HAVE to sell, and it should all be good...

@Tyler Erickson I don't think you will find many people to argue with you that multifamily housing fundamentals are as strong as ever in most markets. I see no parallel with SFR investing other than they are both "housing." Multifamily investing is a business while SFR investing is a hobby.

@Jay Hinrichs very true about construction costs relative rents but I disagree that its happening in "MOST" markets. Definitely true  in coastal blue state markets but in the rest of the country there are few barriers to entry. In AZ you can go from land acquisition to 200 units in 18 months  at $105-$150k/sq foot and thats with new generation amenities such as garages, modern gym facilities, etc. Construction financing is as easy or easier to get than agency debt for an experienced builder. People are buying C class marginal assets for $150k/sq foot, putting white paint on old cabinets and marketing "upgraded" units for $50-$150 discount to the new class A. They believe they can change a community from working class/immigrant base to millennial/students/new residents.  And so far in 2019 they are getting that rent as the market is out of equilibrium still; more demand for units than supply. 

This equilibrium has already changed in many markets and it changes at different times, very market specific. I have a broker sending me Bay Area deals where and I can buy $500k NOI in Hayward/San Leandro/Union City for $8-9M. This is a market that fits your description, no available land, regulations, barriers to entry etc. So why would I pay $12M for that NOI in Arizona on the bet that A class continues to grow in rent and builders do not catch up and oversupply? If your going to buy a 4% cap rate deal where would you rather buy it PHX or SF? Vegas or Seattle? Albuquerque or Portland?  

@Tyler Erickson

Just an opinion but I think your point to @Jonathan Twombly 's comment is a good one but also about the  most misleading thing I see poeple talking about. 

Yes the fact that the right MF that is financed properly can throw off cash to let you hold through a downturn is amazing and can make the investment somewhat unique as well as psychologically easier to hold.

The issue is that this is a double-sided coin. It makes this not just an investment but a business by adding in an operational component. The way people talk about it here you just buy it and the rest is smooth sailing. In reality, the actual managing of the assets is much harder, especially for "workforce housing". Very very few people give this the amount of thought it deserves. Personally, I think the trend of people jumping into apartments really early in their RE investing journey, syndicating those deals to equally inexperienced investors and wanting to quit their jobs like tomorrow for the "easy" world of RE investing is going to be a major issue at some point. Even without accounting for some of the things Jonathan mentioned like not financing the asset properly or stretching to get to a certain IRR, at least many I see are simply unprepared for what is basically an inevitable time of reckoning.

Even without a downturn, this is a big risk but in a downturn its magnified. What are you going to do when your great property manager turns bad because you paid him only 10% and now every tenant is a major issue because he had not experienced this level of issues at one time? What about when your vacancy goes from 8% to 20% and you and every other property are chasing the same shrinking pool of good tenants while also needing to deal with all the things that come with vacant units like construction issues, possible crime, rodents, etc. etc. If you are lucky they just move out, if not you have to evict because they have no reserves and most will tell you sob story after sob story meaning you have to decide who to float and who to evict. Oh yes and by the way while you are dealing with all this you also probably have investors who are now incredibly antsy and become a much bigger hassle to deal with so you get to deal with both at the same time.

Oh and this whole time the valuation of the buildings are going down so good luck getting additional capital if your reserves were not good enough and if you are putting in personal money you have to think if you are throwing good money after bad in a losing cause. If you gave a PG who also have to wonder if this will make you personally bankrupt cause well you don’t really have $1MM in personal assets so you are fairly motivated to sell before it drops even further. 

In short, I think if you are going to tool up after one of the largest expansions in RE prices (rent and buy) that we have ever seen, these are major considerations.

Originally posted by @Serge S. :

@Tyler Erickson I don't think you will find many people to argue with you that multifamily housing fundamentals are as strong as ever in most markets. I see no parallel with SFR investing other than they are both "housing." Multifamily investing is a business while SFR investing is a hobby.

@Jay Hinrichs very true about construction costs relative rents but I disagree that its happening in "MOST" markets. Definitely true  in coastal blue state markets but in the rest of the country there are few barriers to entry. In AZ you can go from land acquisition to 200 units in 18 months  at $105-$150k/sq foot and thats with new generation amenities such as garages, modern gym facilities, etc. Construction financing is as easy or easier to get than agency debt for an experienced builder. People are buying C class marginal assets for $150k/sq foot, putting white paint on old cabinets and marketing "upgraded" units for $50-$150 discount to the new class A. They believe they can change a community from working class/immigrant base to millennial/students/new residents.  And so far in 2019 they are getting that rent as the market is out of equilibrium still; more demand for units than supply. 

This equilibrium has already changed in many markets and it changes at different times, very market specific. I have a broker sending me Bay Area deals where and I can buy $500k NOI in Hayward/San Leandro/Union City for $8-9M. This is a market that fits your description, no available land, regulations, barriers to entry etc. So why would I pay $12M for that NOI in Arizona on the bet that A class continues to grow in rent and builders do not catch up and oversupply? If your going to buy a 4% cap rate deal where would you rather buy it PHX or SF? Vegas or Seattle? Albuquerque or Portland?  

well blackstone bought 30k sfr's and I would not call them a hobbyist.. 

I think you have to look at the strength of the market.. much of what has driven PHX was new construction and all those workers that lived in the apartments.. in 04 clients of mine ( I did not broker them linda gerchek did)  bought 4 plex in PHX for 350k each by 2010 they were 100% vacant and selling for under 100k.. now granted rising tide raises all ships.. but in the other areas you mentioned they are not as susceptible to wild swing in valuation when new construction slows way down or comes to a half.  Anyway just one guys take on it from the cheap seats.. 

Originally posted by @Charles Worth :

@Tyler Erickson

Just an opinion but I think your point to @Jonathan Twombly's comment is a good one but also about the  most misleading thing I see poeple talking about. 

Yes the fact that the right MF that is financed properly can throw off cash to let you hold through a downturn is amazing and can make the investment somewhat unique as well as psychologically easier to hold.

The issue is that this is a double-sided coin. It makes this not just an investment but a business by adding in an operational component. The way people talk about it here you just buy it and the rest is smooth sailing. In reality, the actual managing of the assets is much harder, especially for "workforce housing". Very very few people give this the amount of thought it deserves. Personally, I think the trend of people jumping into apartments really early in their RE investing journey, syndicating those deals to equally inexperienced investors and wanting to quit their jobs like tomorrow for the "easy" world of RE investing is going to be a major issue at some point. Even without accounting for some of the things Jonathan mentioned like not financing the asset properly or stretching to get to a certain IRR, at least many I see are simply unprepared for what is basically an inevitable time of reckoning.

Even without a downturn, this is a big risk but in a downturn its magnified. What are you going to do when your great property manager turns bad because you paid him only 10% and now every tenant is a major issue because he had not experienced this level of issues at one time? What about when your vacancy goes from 8% to 20% and you and every other property are chasing the same shrinking pool of good tenants while also needing to deal with all the things that come with vacant units like construction issues, possible crime, rodents, etc. etc. If you are lucky they just move out, if not you have to evict because they have no reserves and most will tell you sob story after sob story meaning you have to decide who to float and who to evict. Oh yes and by the way while you are dealing with all this you also probably have investors who are now incredibly antsy and become a much bigger hassle to deal with so you get to deal with both at the same time.

Oh and this whole time the valuation of the buildings are going down so good luck getting additional capital if your reserves were not good enough and if you are putting in personal money you have to think if you are throwing good money after bad in a losing cause. If you gave a PG who also have to wonder if this will make you personally bankrupt cause well you don’t really have $1MM in personal assets so you are fairly motivated to sell before it drops even further. 

In short, I think if you are going to tool up after one of the largest expansions in RE prices (rent and buy) that we have ever seen, these are major considerations.

Charles, my friend, you raise such an important point here, and I think it should be a separate blog post to get the attention it deserves. I don't think this point is raised nearly enough.

I can personally attest to the fact that running C-class apartments is difficult - and that is having purchased the property early in the cycle and swinging into a rising economy. That is with hiring a very large management company, which later had to be fired for incompetence.

Bad debt and evictions were a constant struggle, as were unexpected capital items and tenant-caused disasters like fires and people driving their cars into my buildings. (This happened more than once, so it's a thing.)

What I have discovered, the hard way, is that so many Americans are living close to the edge of survival that paying rent is a struggle. Investors are celebrating rent increases left and right but ignoring the fact that, while their tenants can "afford" the increased rents on a rent-to-income analysis, they cannot afford the rents on an income-to-expense analysis, when you include their cars, credit cards, etc.  People will default on their rent before they default on their car payments in many markets, because lack of a car means you cannot work, eat, socialize or anything.

Even when I brought in a better management company, the properties that struggled with these issues continued to struggle.  You can't get blood from stones.

Now, I remind you that these properties were purchased with the wind at my back.  And because of the insatiable greed for apartment properties these days, I was able to sell these properties at substantial profits that were not justified by the cash flow.

But if I were to buy these properties today, at the inflated prices we see, and then experienced the exact same problems, I would probably have been looking at foreclosure.  Remember, those are operational problems in a strong economy.

Imagine what this will look like when vacancy isn't at all-time highs.  When turnover isn't at all-time lows. When people start losing jobs and delinquency, bad debt and vacancy really bite hard.  When, as Charles said, you and every other operator in the market are fighting for a shrinking tenant base and offering concessions and lowered rents to try to get people in the door?

And it may not require a bad economy for the competition for tenants to heat up.  Just today, Green Street Advisers is warning about a deadly combination that may hit some rental markets soon - accelerating supply and decreasing demand, as the Millennials age out of renting and the following generation is much smaller in number.

All of this militates for a very conservative approach to investing in apartments - exactly the opposite tack being taken by investors out there  "making" deals work.

Originally posted by @Serge S. :

@Tyler Erickson I don't think you will find many people to argue with you that multifamily housing fundamentals are as strong as ever in most markets. I see no parallel with SFR investing other than they are both "housing." Multifamily investing is a business while SFR investing is a hobby.

@Jay Hinrichs very true about construction costs relative rents but I disagree that its happening in "MOST" markets. Definitely true  in coastal blue state markets but in the rest of the country there are few barriers to entry. In AZ you can go from land acquisition to 200 units in 18 months  at $105-$150k/sq foot and thats with new generation amenities such as garages, modern gym facilities, etc. Construction financing is as easy or easier to get than agency debt for an experienced builder. People are buying C class marginal assets for $150k/sq foot, putting white paint on old cabinets and marketing "upgraded" units for $50-$150 discount to the new class A. They believe they can change a community from working class/immigrant base to millennial/students/new residents.  And so far in 2019 they are getting that rent as the market is out of equilibrium still; more demand for units than supply. 

This equilibrium has already changed in many markets and it changes at different times, very market specific. I have a broker sending me Bay Area deals where and I can buy $500k NOI in Hayward/San Leandro/Union City for $8-9M. This is a market that fits your description, no available land, regulations, barriers to entry etc. So why would I pay $12M for that NOI in Arizona on the bet that A class continues to grow in rent and builders do not catch up and oversupply? If your going to buy a 4% cap rate deal where would you rather buy it PHX or SF? Vegas or Seattle? Albuquerque or Portland?  

 This is article from Green Street Advisers is pertinent to your comment.  https://www.greenstreetadvisors.com/insights/blog/whats-ahead-for-u-s-apartments?utm_campaign=Market%20Currents&utm_source=hs_email&utm_medium=email&utm_content=71006850

A and B quality multi-family in major markets are simply priced too high.  @Johnathan Twombly seems to have similar sentiment.  

But how did we get to these prices?  Post crash, multi-family went on a great ride.  Availability of capital, decreasing vacancies, rental increases and a demographic shift favoring rentals.  The market incorporated all of this good news already into pricing.

And new construction of apartments has made a comeback big time.  I still think certain West Coast markets have room to absorb lots of new apartments.  The problem is getting the entitlements to build them.   And the construction costs.

Originally posted by @Tyler Erickson :
Most of us on these forums strongly consider multi-family to be a solid investment, but not everyone fully understands why. On the other hand, many people have fears over a stagnating economy... We can only go this hard for so long, right? Well, it seems that at least in some aspects of investing, we certainly can. 

Below are the cliffs for an article regarding multifamily investing that I believe most people will find interesting, whether you're in San Francisco, Minneapolis, Chicago, LA, or virtually any other place with a multifamily infrastructure in place (and even SFR's, honestly, but this article focuses on multifamily properties), you will benefit from this information.

Keep in mind, however. Data and trends seem to be the new snake oil of the 21st century. As anti-intellectual as that sounds, it's easy to grab a set of data points to argue your point, while ignoring other contributing factors that may or may not fully justify the point you're trying to make. As such, I am not making any strong assertions, I just want to share the data with those that find it interesting or pertinent. One of the sources is at the bottom... I can't post more than one link. 

General Information:

  • Workforce housing offers steady income streams that adjusts with inflation annually. 
  • Interest in high-quality rentals is increasing across all price points and regions, indicating a well-diversified inventory.
  • Homeownership rate across all ages is near historic lows.
  • In half of all counties nationwide, it is now cheaper to rent than buy. 
  • All forms of housing assets report low availability and high pricing. 
  • Older adults are divorcing more frequently while younger adults are postponing marriage more than previous generations.
    • Both of these factors are positive indicators for the rental economy.
  • Wealth and income gains have not kept up with housing costs.
  • Wealth accumulation models seem to be changing; net worth is shifting from property ownership to defined contribution (DC) plans. 
  • Multifamily housing for low/median earners actually outperformed the overall multifamily market for four years straight.
    • Can be attributed to low vacancy rates and above-average rent growth. 


The Numbers:

  • Occupied US rentals rose by 20 percent above the prior 10-year period.
    • This growth is unprecedented. 
  • Student loan debt stands at $1.5 trillion, inducing an average millennial net worth of less than $0. 
  • Over the next decade, the US is poised to add more than 10 million new households.
  • 500,000 new rental households per annum through 2025. 
  • Total housing units in 2018: 120 million
    • 65% by owner (77 million)
    • 35% renter households (43 million)
  • Currently, 24% of U.S. renter households spend more than 50 percent of their annual income on housing. 
  • 30% are cost-burdened, according to HUD.
  • Approximately 13.5 million households are "renters by necessity".
  • Workforce housing (low/median earners) has brought in $375 billion in investment over the last five years.
    • More than 51% of the total for all multifamily asset classes.
    • Despite this investment, only a "small" amount of workforce housing has been built in the last 10 years, with investors usually opting for luxury rentals. 
  • Approximately 100,000 units are removed per year due to obsolescence - predominately workforce and affordable housing units.

Going forward:

  • Rehab and value-add approaches seem to be most favorable, particularly in high-cost and high-growth metros and submarkets. 
  • Entry-level rental housing will likely see the strongest growth as millennials leave their homes
    • 30% of millennials currently live with family, yet are the primary renter base. 
  • Large opportunity to provide quality, moderately-priced rental housing in densely populated areas. 
  • Low-cost rentals are largely unavailable, despite high-demand. 
  • There may be opportunity in rural areas, as well, to increase supply of moderately-priced housing due to high demand.
  • Rent growth is higher than income growth, which may present a financial limit to workforce housing cash-flow.
  • Overall, there's plenty of opportunity for both preserving existing and building new workforce housing. 

Thoughts?

NREI - Why U.S. Apartment Rentals Will Continue to be a Good Investment Choice

 Thanks for sharing this Tyler.

This is why I love multi-unit apartments. I just closed on a 300-unit recently precisely because of the facts you cited in this report.

I buy houses too but only to re-sell them but multi's are where I build my cashflow and long term wealth.

@Jonathan Twombly

"Over the long run the world’s most successful investors are successful because they focus on minimizing downside risks rather than maximizing upside gains. "

This can't be repeated enough in the MF business! Well said.

Great information, Tyler. Obviously the long-term market implications suggest multi-family will be a good buy-and-hold asset in the years to come. I also appreciate the moderating advice from @Jonathan Twombly and @Charles Worth , reminding us that regardless of outlook, we must always buy right and consider leaner times. At the moment our vacancy rates  are at an all-time low, rents at an all-time high, which means at some point they will decline relative to other measures. So, overall, BUY, but buy right and perform strict due diligence, and have reserves at hand. Thanks for all the great comments on the thread!

@Tyler Erickson

Great post! As a new developer who’s primary focus is to rehab and develop affordable housing, the price of land, materials, and labor make it almost impossible to provide affordable housing, especially in the new construction space.

So, while the rental market is strong, and looks to stay that way in the near future, I believe there is exponential growth in the lower income rental classes. The question is how do investors/developers provide affording living, while still making a reasonable profit? I’m still trying to figure this out lol.

I know here in Atlanta, our economic development fund only requires 20% of units to be affordable if they are providing some type of funding. This simply isn’t enough in my opinion.

Either way, apartment investing is the way to go regardless of what asset class you invest in.

  1. Originally posted by @Canesha Edwards :

@Tyler Erickson

Great post! As a new developer who’s primary focus is to rehab and develop affordable housing, the price of land, materials, and labor make it almost impossible to provide affordable housing, especially in the new construction space.

So, while the rental market is strong, and looks to stay that way in the near future, I believe there is exponential growth in the lower income rental classes. The question is how do investors/developers provide affording living, while still making a reasonable profit? I’m still trying to figure this out lol.

I know here in Atlanta, our economic development fund only requires 20% of units to be affordable if they are providing some type of funding. This simply isn’t enough in my opinion.

Either way, apartment investing is the way to go regardless of what asset class you invest in.

 I think you may be misunderstanding "affordable". In the context of this thread, I don't think we are talking about any such definition by the government, any subsidized or discounted rents. What we are talking about here is placing rents within the spectrum whereby the top is defined by Class A construction. This, by the way, is not new and has always been the rationale.

Say in Atlanta apartment rents range from $650 to $1800. New construction covers $1500 - $1800 because this is what they need in order to make economic sense. This means that the existing stock is in the range of $650 - $1500.

The question is - where in this range do you want to be? You are trying to accomplish several objectives:

  1. To be affordable to the widest possible audience.
  2. To be safe from Class A compression that will eventually come due to eventual over-supply.
  3. Product that is good enough, young enough, not functionally obsolescent.
  4. And, obviously, you want a fairly stable/manageable tenant base which makes you money...

Generally speaking, all good things happen somewhere around the golden mean. In this case, within the range of $650 - $1500 this is $1000 of rent. Or, in apartments, $800 - $1200 depending on size.

If your underwriting works to acquire what will be $800 - $1200 rents, then you do it. What you are buying is affordable housing. In a market ranging from $500 to $1200, you'd need to stay in the $700 - $800 range, but this may represent difficulties relative to CapEx. Makes sense?

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