My Short Multifamily Macro Thesis for 2021

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Multifamily apartments are not only real assets, they are also one of the best inflation hedges compared to any other investment asset class. They also have a long track record of appreciation, cash-flow, and tax benefits.

The United States is experiencing a severe housing shortage. Even as over 360k apartments will be built in 2021, data suggests developers will fall nearly 100k units short of the 460k units of projected absorption. Multi-decade-high household formation, spurred by post-pandemic job growth, has lead to record occupancy levels, especially in economically resilient markets such as Indianapolis, IN in addition to markets across the Sunbelt. 

Record-high home values have widened the affordability gap, creating an even larger number of renters-by-necessity, putting even more pressure on apartment demand. Rent growth is up 6.8% year over year nationally.

Simultaneously, demand for multifamily apartments from investors continues increasing as real yields on most bonds are negative. Global investors and retiring baby-boomers intensify their search for yield. A strong performance from multifamily assets during the pandemic only solidified the asset class's claim to being "recession resilient." 

Interest rates are at a multi-millennial low, combined with strong growth is creating attractive yields for multifamily investors even in a low cap rate environment. Cap rates will continue to compress until growth slows significantly and or if and when interest rates rise.

One of the greatest transfers of wealth in human history is currently underway and real estate is the most time-tested method to grow and preserve wealth. Given the current economic, demographic, and social trends, allocating capital to multifamily apartment assets in growing, business and tax friendly markets appears to be an incredibly compelling opportunity.

@Spencer Gray

Excellent post, good points and I agree with your thesis.

After 40 years of real estate investing through numerous economic cycles, the only thing I would add is:

The only constant is change.

All the data you provide is accurate now and I expect to remain accurate over the next few years. I don’t know when but I do know at some point something will change.

Investors will do well to make decisions understanding things will change and that these inevitable changes should be considered when building an investment portfolio. An investment portfolio should, in my opinion, be built to withstand a downturn.

Things look great for multifamily NOW but to assume this is how it always will be would be a mistake.

@Spencer Gray Nice summary, one question I often get from investors who are more familiar with single family investing is that prices have already gone up so much and they think real estate prices are about to crash, as you know there is some amount of education involved in describing how multifamily investing is different.   Having said that the biggest problems I see with syndication deals for the average investor is the minimum required for each deal, even if one deal goes south then the gains from all the other deals get wiped out. 

@Badri Malynur When I get this question, and I ask it myself all the time, I try to identify the evidence that points to a market crash. The majority of the evidence on the side of a pending crash or bubble is simply that prices are higher than they were. While we'll have some kind of mean reversion at some point, there's simply little evidence that the longer term trend of upward price pressure from increased demand will simply reverse. 

Investors can pay more because of the fundamentals, primarily rental growth, occupancy trends, and very low interest rates. When any of those three change significantly, we will most likely see a slow down and modest reversion. 

@Spencer Gray Thanks for sharing this! It's clear you are a high analytical skillset and make a lot of data driven decisions for your company. What are some of your favorite sources to stay up to date on the market?

@Justin G. Thanks man! Real estate is still an incredibly inefficient market and data can be a great tool to find and exploit those opportunities  

You've teed me up to pitch our newsletter and multifamily intelligence aggregator but I'm pretty sure it's against the forum rules, but we put a lot of resources to aggregating every research report and article that is released on the multifamily industry for free and put it out to the public. We've essentially built a system of RSS feeds and a small human team that aggregates and curates. 

All the major brokerage shops, Real Page, Yardi, Co-Star, NAR, NMHC, Apartment List, Zillow, Harvard, Bigger Pockets etc all put out great reports. GlobeSt, Bisnow, Wealth Management, Bloomberg, all put out consistent articles on the multifamily industry.