How to embrace multifamily housing as a long-term investment



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Until early to mid-2023, multifamily housing’s short-term play moved ever upward. Occupancy rates and rent growth trended at near-highs, demand lapped supply and price-per-unit values extended their gains. The three-year period was among the most fertile for multihousing we’ve seen in decades.

But the short-term bloom always fades. Analysts now project a fiscal haze looming over the multifamily market. The National Association of Home Builders sees a “large decline” in multifamily starts in 2024. J.P. Morgan predicts slowing growth in the industry. And according to Bloomberg, the multifamily “deal binge in 2021 will result in a huge hangover.”

We understand. The Federal Reserve is pausing interest-rate reductions until inflation decelerates. More apartment inventory comes online this year, likely curbing rent growth. Meanwhile, construction, insurance and maintenance costs aren’t relenting, leaving investors shy about building or buying. No wonder the short-term outlook has shifted negative.

Multifamily housing, however, isn’t a short-term industry. It isn’t day trading. Multifamily investors serve their interests best when they invest long-term.

Certainly, near-term concerns exist, especially for recent buyers with significant debt loads and high refinance rates. Yet we’re still bullish on multifamily, because when you manage the ebbs, the industry flows in only one direction: forward. Here’s why.

Why multifamily housing is a long-term investment

The multifamily housing industry is always building toward that future — often not fast enough. A 2022 joint study by the National Apartment Association and National Multifamily Housing Council projected that the U.S. would require 3.7 million new rental properties with at least five units by 2035. The study updated NAA and NHMC research from 2017, when the agencies said the U.S. would need 4.6 million apartment units by 2030

The updated research noted how acute circumstances can complicate long-term projections. For instance, the paper notes, “We did not foresee a global pandemic nor the persistent impact on the housing market.” Neither did the agencies expect a 2020 recession and a federal stimulus program “in concert with a mortgage buying program” to hold down interest rates at the time.

Economic factors, notably interest rates and inflation, often impact short-term multifamily performance, as do employment and salary figures. Meanwhile, trends in population growth, immigration and migration patterns all drive short- and long-term change in multifamily.

Submarkets further expand or contract depending on the confluence of these forces, which exert constant pressure on the industry. In the short term, investors might shrink from this market. Those who do should consider the chief long-term reason for investing in multifamily housing: Everyone needs a place to live. 

What is a long-term investment in multifamily?

To reiterate, multifamily is not day-trading. The business relies on debt to make deals. Acquiring debt requires a long-term view. To evaluate buying opportunities, we project performance over five- and 10-year scenarios. Predicting long-term ROI is complicated, as short-term pressures indicate, but if the projections work over those dual periods, we feel comfortable making a deal. We then adjust decisions in real time as circumstances change.

However, others have run different tracks. When interest rates and construction costs were lower, some developers built properties, stabilized them and sold quickly, often within two years. They then recycled the cash quickly into the next property. We understand the strategy but also see how short-term debt is bearing stress now in a high-rate market. We believe businesses operating that way should rethink their holding periods. 

Generally, the price-per-unit of properties purchased five years ago is higher today. That’s how we invest. Even if a short holding period results in negative returns, the long play usually turns positive.

What about the short-term concerns?

Multifamily housing’s equilibrium will continue to swirl in Q2 and Q3 of 2024. Interest rates remain high, and the Federal Reserve appears unwilling to cut until it gains “greater confidence” that inflation will curb, according to the Associated Press. Occupancy rates and rent growth will cool as the industry absorbs the enormous amount of new inventory coming online. All that signals short-term market duress in multifamily.

However, U.S. employment remains relatively steady, according to the Bureau of Labor Statistics, and wages are up (4.4 percent for civilian workers, 4.3 in the private sector) year-over-year. Those factors, combined with the high costs of homebuying, have helped grow the renter pool. As a result, multifamily housing is navigating a complex short-term economic current rather well.

The Urban Land Institute addressed these factors in a recent article about the real estate industry sitting on “high alert for signs of stress in multifamily.” But as Vincent DiSalvo, CIO at Kingbird Investment Management, said in the piece, “The cracks that we’re seeing are not structural; they’re superficial.”

How to be a long-term player in multifamily housing

I began my career in multifamily housing a bit naive to the risks. Some of my early investments benefitted from “right place, right time.” Now wiser, I look to place investments in the right place and right time. These are a few key strategies:

  • Perform your due diligence: Research is essential. Learn about booming job hubs, regional population rates and demographic information (birth rates, age medians, etc.). The multifamily industry rides national trends but is a local business. Learn about locations. For instance, The Wall Street Journal called Utah “America’s hottest job market.” When jobs grow, renters follow.
  • Embrace challenging conditions: Buyers with courage in this market could be rewarded. We’re still in acquisition mode, particularly for existing properties in locations that don’t have much in the supply pipeline. We expect the higher debt rates and costs to be absorbed through rent-growth income.
  • Surf the short-term cycles: Economic, societal and cultural factors always prod or pinch multifamily housing. Successful operators surf these waves on a sturdy longboard fixed on the fundamentals: Give people enticing properties in places they want to live.

As the investment firm KKR noted in a recent piece, titled “When Fear Is a Friend,” multifamily’s performance “has traditionally remained stable through economic cycles.” We agree. Multifamily performance hinges on investor knowledge and temperament as much as economic conditions.

In commercial real estate, multifamily continues to yield positive growth, unlike the far different realm of office space. In my career, I’ve never seen a situation in which longer-term holds have not yielded positive returns. That’s why I’m bullish on multifamily’s long term, even as the bears gather in the short term.

Michael H. Zaransky is the founder and managing principal of MZ Capital Partners in Northbrook, Illinois. Founded in 2005, the company deals in multifamily properties.

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