As the U.S. economy continues its longest ever expansion, the labor market is making history as well with the lowest unemployment rate in 50 years. That’s great news for investors looking for compelling return opportunities in the commercial real estate market. But because pricing for all types of CRE products has also increased, it’s vital to look for areas of opportunity, such as workforce multifamily rentals in secondary markets with strong fundamentals.
Today, demand for workforce multifamily housing is far outpacing supply. To keep pace, apartment developers would need to build an average of 328,000 units per year through 2030 — a figure that has only been met once in the past 30 years.
While other CRE product types are also attractive, I believe multifamily rentals will be the industry’s leader in 2020. As a 30-year veteran of the multifamily sector who has successfully built and sold three workforce housing portfolios worth $7 billion, I believe there are five powerful drivers for the market: waves of renters, job portability, strong economy, sound fiscal policy and plenty of dry powder.
Waves Of Renters
While the demand for housing is supported by all age demographics, millennials clearly have an increasing appetite for apartment living. Even though rents have increased by 3% since last year, younger members of the workforce understand that rental housing is more convenient and more affordable than ownership. As more members of Generation Z enter the rental market and seek off-campus housing or their own apartments, demand for multifamily will be bolstered by this emerging demographic wave.
Job Portability
Being able to sign a short-term rental contract is an advantage for workers of all ages who don’t want to get locked into a permanent job or home ownership. Demographics in the U.S. continue to shift with millennials moving from the Northeast into the Southeast and Texas. The flexibility available to renters seeking job opportunities across town or across the country is well aligned with today’s job market, particularly the growth of the freelance and the “gig” economy.
Strong Economy
With modest GDP growth and a low jobless rate projected for 2020, the U.S. economy remains strong, even if there is a slowdown in the months ahead. However, the nation’s long economic expansion has not been spread equally across all 50 states. Major metros like San Francisco, New York and Seattle have seen an explosion in the technology sector, attracting more workers, while pushing up the cost of housing. In response, companies in all sectors are looking for lower-cost business locations that appeal to Generation Z and Millennials. Today, around half of the top 10 states for job growth are found in the Southeast and Southwest, pointing to opportunities in the multifamily space. In addition, rising wages support rent increases in many markets — another potential advantage for investors.
Sound Fiscal Policy
Historically low interest rates and a sound fiscal policy have created favorable lending conditions for multifamily acquisitions. Those low rates also create opportunities for owners to refinance and pull additional equity out of a property, increasing dividends in the process. Whether looking for short-term opportunities to purchase, add value and resell, or pursuing a long-term hold strategy, the Fed’s fiscal policy will benefit multifamily investing in 2020 and beyond.
Dry Powder
Currently, more than $2 trillion of private equity capital is waiting to be placed in CRE investment vehicles that are in limited supply. Too much “dry powder” has left capital chasing deals in virtually all product types. While multifamily acquisitions can be competitive and the bid-ask gap can be a challenge, this sector continues to offer a wide range of appealing investment opportunities. Workforce rental housing will be in demand for the foreseeable future, with far less volatility than other CRE products — especially when those properties have strong management. Overall, real estate outperformed the stock market by approximately two-to-one in a recent 16-year period, showing its resiliency through an expanding and contracting economic cycle.
The Sweet Spots
Population trends, job growth and low interest rates are long-term trends that support investments in the workforce multifamily sector. Here is a “top-down” strategy for savvy investors seeking to capitalize on these opportunities in 2020:
• Look beyond the “hot” urban markets like San Francisco, New York and Seattle, which have high acquisition costs and limited upside potential.
• Focus on moderately priced secondary markets in the Sun Belt states.
• Analyze population and job trends to identify communities with strong potential demand for workforce rentals.
• Study the supply side to see how many new units are in the pipeline within the next two to five years.
• Look for submarkets within your target community with low vacancy rates and potential for rent increases.
• Partner with a local multifamily expert to identify appropriate properties that meet your investment criteria.
As apartment demand continues to outpace supply, private equity investors can take advantage of upward pressures on occupancy rates and rents, creating opportunities for highly attractive and stable returns. I expect multifamily will be a clear choice in results-driven investing for 2020 and years to come.