Our previous post discussed why institutions generally allocate a significant portion of their investment portfolio to private real estate (PRE). In addition, we highlighted several ways private real estate might help improve a portfolio’s risk-return profile. In this discussion, we zero in on the multifamily asset class and explore why it is often a preferred property type among many pensions and endowments.
The Multifamily Sector
Multifamily properties represent a broad sector of the private commercial real estate industry and can range in size from a single duplex rental property to a 1,000+ unit apartment complex. Multifamily housing can include garden style, mid-rise, high-rise, and mixed-use apartment complexes.
Investors can access this sector with several different investment strategies that can include core, core plus, value-add, and opportunistic; each serving a specific role on the risk-return spectrum. Institutional investors often prefer core investments because they own high-quality properties in major markets and have stabilized occupancy secured by flexible leases with creditworthy tenants.
Market Outlook
2021 was a stellar year for Multifamily investors, and many believe that trend will continue throughout 2022.
By the Numbers
CBRE U.S. Real Estate Market Outlook 20021
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While not every industry expert may share CBRE’s optimistic outlook, many would agree 2022 should be another strong year for institutional and accredited investors allocating to Private Multifamily Real Estate, despite current economic uncertainty and volatility in capital markets.
Performance Drivers
According to David Brickman, CEO of NewPoint, a leading institutional real estate lender, the U.S. Multifamily sector is being fueled by three economic engines.
Three Economic Engines ‘All Firing’
“We have three major engines of growth firing at the same time, economic and job growth, housing demand, and in the case of fast-growing cities, in-migration—and all of this accelerates rent and price appreciation when set against the backdrop of the continuing deficit in total housing construction and insufficient supply.” - NewPoint CEO David Brickman tells GlobeSt.com.2
In its 2022 Multifamily Market Outlook, Fannie Mae highlights three factors that will likely contribute to solid Multifamily performance this year and after3.
1. Positive Demand Expected to Continue in 2022
“Demand for multifamily rental units was quite robust in 2021, and we expect it to remain positive but moderate further out in the forecast starting in 2023.”
2. Vacancy Rates to Hold Steady
“The national multifamily vacancy rate is expected to remain flat in 2022, primarily due to the amount of new supply expected to deliver over the next 12-18 months.”
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Source: Fannie Mae Multifamily ESR
3. Rent Growth Expected to Moderate but Remain Strong
“We expect rent growth to remain positive in 2022 but to moderate from last year’s accelerated pace to a more reasonable, yet still-elevated level.”
Mid-Year Market Dynamics Fueling Additional Demand
As we round the corner halfway through 2022, new market dynamics may increase demand for Multifamily even more than predicted at the beginning of the year. Consider:
- According to a new survey from the U.S. Census Bureau, rental vacancy rates through Q1 2022 were hovering near historic 35-year lows, reaffirming the ongoing demand for Multifamily housing.
- According to a Wall Street Journal article, the 30-year fixed interest home mortgage rate hit 5.78% in June 2022—the highest in over thirteen years—which will likely force an entire population of would-be homebuyers to continue renting.
Both factors may exacerbate the housing shortage and could push rents and net operating income higher. In fact, rents hit a record high in April 2022 according to a report from realtor.com, with the national median rent up 16.7% from a year earlier.
And perhaps the most compelling case for continued demand of Multifamily Commercial Real Estate is how the institutional managers (pensions and endowments) allocate their investment portfolios. Dennis Martin, Head of Americas Business Development at PGIM Real Estate explained:
“Since the global financial crisis, we have seen very steady growth in allocations to real estate. Institutional allocations have increased by 20 percent to 30 percent or as much as 200 basis points of total asset exposure.” - wealthmanagement.com; April 2022
Hedging Inflation
Perhaps even more important to institutional investors than the strong fundamentals supporting the multifamily market is the ability of property owners to raise rents quickly.
Since most tenant leases are written for short terms (typically 6 to 12 months), owners can raise rents to keep pace with improving market conditions and rising costs. This feature is precious during periods of high and persistent inflation.
For institutional investors, the short-term multifamily lease may improve portfolio performance by helping to stabilize income and returns when other asset classes don’t have that same inflation-hedging capability.
Multifamily: Not Just for Institutions
This two-part series discussed why many institutional investors use Multifamily Private Real Estate to help improve portfolio risk-adjusted returns. You may also find the potential benefits of Multifamily investing could help enhance your portfolio.
If you’d like to learn more about the multifamily investment option, download our FREE eBook, A Potential Inflation Hedge for Today: Private Multifamily Real Estate. You can also conveniently schedule a one-on-one meeting with me HERE.
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1https://www.cbre.com/en/insights/books/us-real-estate-market-outlook-2022/multifamily
6 https://www.cnn.com/2022/05/19/homes/us-rents-april/index.html
Topics: Insights, Multifamily