Many investors are scratching their heads wondering why certain asset types have been largely unaffected and, in some cases, even performing better and trading at higher prices than before the pandemic. Not all Commercial Real Estate has been negatively affected during this pandemic and Multifamily Real Estate specifically continues to outperform many other investments, and here is why.
Government and Monetary Policy -
Interest rates have been going down consistently since 2008 and have descended at an accelerating pace since the beginning of 2019. Multifamily Real Estate is primarily bought with debt and since interest rates on debt have been so low, it has been more attractive to take out debt as investors are making lower yields on other more fixed investments.
In the months since the initial coronavirus lock down, the US government printed approximately $3 trillion dollars - that is more than was printed in the decade following the 2008 financial crisis. With so much money being printed, the likely result will be inflation. As inflation increases, rents go up and if your debt is at a low fixed rate, you will likely end up in a more profitable position in the future.
Consumer Behavior -
Especially during this pandemic, people in general have been spending much more time at home. When people spend more time at home and spend less discretionary money out of home, they value their home more and are willing to spend more for it. They are less likely to forgo expenses in their home.
People are eating at home more and many homeowners are making improvements to their homes and building pools, etc. I don’t have hard data for my neighborhood, but I have personally witnessed dozens of additions and building of in-ground pools among single family homes in my immediate area. From a renter perspective this translates into nicer furnishings, TVs, more cleaning, and this also means they are looking for cleaner living arrangements that have a lower density of people.
Supply and Demand Imbalance -
In several sub-markets across the US and notably in Central PA, there is a housing shortage. This is further exacerbated by the population growth and migration to this area from larger cities in the Northeast and Mid-Atlantic where people are looking for a lower cost of living and an overall better quality of life.
There has been limited new home and multifamily construction, and during the pandemic, construction all but grinded to a halt. Now, new construction Costs are going up with longer lead times on materials, more regulations during construction and more expensive labor.
In Summary
Multifamily is not without headwinds like the National CDC Eviction Moratorium and others on a state and municipal level. In practice though, tenant eligibility for all the factors needed is not as easy as it appears. To succeed in Multifamily, you need a good team and operations. If you have questions as you are evaluating Multifamily as a potential investment type or a particular asset, please reach out.
Ari Sznajder, MBA, MPP is the Founder of the Kapel Group, an Investment Management Company focusing primarily on Commercial Real Estate. Before that, he worked for 12+ years in Corporate America (Hershey, Kraft) as a Sales and Marketing Executive. Kapel Group and associates have been investing in Central PA for over 7 years and hold a multi-million-dollar portfolio of Commercial Real Estate assets in the Region.
