Unprecedented Structural Shift - The Thriving Multifamily Market

[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

[Jonathan Twombly]

@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.