Investors Will Remain Interested in Multifamily Through 2015 (And Likely Beyond)

Posted on May 15, 2014

It’s no secret that the nation’s apartment sector has been on fire in recent years. With new multifamily construction largely stalled and home-ownership on the decline, occupancy and rental rates at apartment communities surged, and investors entered the market in droves.

Now, with construction levels beginning to rise and the single-family housing sector showing signs of recovery, people have been wondering if multifamily’s moment in the sun has passed. In short, my answer is, “No.”

The sector should continue to experience strong consumer and investor demand for at least several years. The kinds of properties investors are chasing, however, are changing.

Demand for stabilized C assets

Last year was nearly a record-setting one for apartment investment sales. According to Real Capital Analytics (RCA), the U.S. multifamily sales volume reached $103.5 billion in 2013, a nearly 18 percent increase from the year before and almost matching the previous record of $105.7 billion, set in 2007.

2014’s sales volume could dip some from last year’s figure, but several of 2013’s trends are likely to remain in place. For starters, with cap rates becoming ever more compressed in gateway markets such as New York, San Francisco and Washington D.C., investors of different stripes are pursuing class-A and -B assets in secondary and tertiary markets, especially in the Southeast.

According to RCA, investment sales jumped significantly in several secondary and tertiary markets in the region—such as Charlotte, N.C. (64 percent); Birmingham, Ala. (60 percent); Nashville, Tenn. (35 percent); and Raleigh-Durham, N.C. (37 percent)—in 2013, and we’re seeing similar levels of investor interest in these areas this year.

Furthermore, many investors are returning to the stabilized class-C sub-sector in primary markets. Until recently, buyers were only interested in these assets, typically located in rougher parts of town, if they were distressed and could be purchased from lenders at a discount. Now, with stiff investor competition in so many other facets of the apartment sector and occupancy rates rising in these assets, investors are seeing the potential for solid returns in class-C properties in major markets.

How long will investor interest last?

Approximately 160,000 new units will be completed nationwide this year, Reis says; that’s about 33 percent higher than the historical average for annual completions. As a result, the organization predicts that the national vacancy rate, which dipped to a record-low of 4.1 percent at the end of last year, will stand still in 2014, marking the first year since 2009 that it has not dropped.

However, because of the still-miniscule vacancy rates and the improving economic and employment pictures, rents will continue to rise, Reis forecasts.

Looking further ahead, as more Millennials enter the job market and the economy continues to (hopefully) expand, it’s not far-fetched to see multifamily vacancy rates remaining at near-historic lows for another half decade. After that, accumulated new construction may start to outpace demand.

Considering this, investment sales should remain particularly brisk through 2015. What happens after that will be heavily influenced by the investment alternatives. If investors can find greater risk-adjusted returns elsewhere, capital may migrate away from multifamily, but this sector likely will remain a favorite for those seeking to invest in real estate.