Commercial Real Estate Frontline

This past Wednesday, I attended an enlightening session sponsored by the Real Estate Finance Association on multi-family investments and the economy. As many of us connected to the multi-family real estate sector get nervous about where things may be headed, I thought I’d share my take away from this session: There is a silver lining for multi-family operators in this economic cloud.

The speaker was Robert Dewitt, Vice Chairman, President, and CEO of GID, a major multi-family investment advisory and management company, with apartment buildings in some 14 states. Mr. Dewitt has a well-informed read on the landscape of multi-family investment ranging from capital markets trends and the impact on institutional investors, such as the pension funds that are GID’s customers, as well as the average multi-family investor.

While the news headlines are showing capital markets unraveling in ways that are very unsettling for the big investor, those who have or are acquiring apartment buildings are capitalizing on a surge in demand for rental housing. The consensus is that the apartment occupancy rate is currently hovering in the upper 90’s, with GID recording a 97.6% occupancy rate nationally and virtually 100% in markets such as New York and New Jersey. This makes it possible for apartment building owners to keep rent levels anywhere from stable to increasing, with several operators in the room saying they’re able to raise rents in this market.

So, what’s contributing the growing demand for apartments in spite of the meltdown that is evident in the larger economy you may ask? Well several demographic and attitudinal shifts can be attributed to this trend. Already, some 1.8 million households have been converted from single family dwellings to apartments. Also, the credit crunch and general uncertainty is causing individuals to delay their decision to buy homes and stay longer in their rental living arrangements. We’re also seeing that on-going trends with immigration and younger people ready to move into their own apartments as additional factors. Finally, the supply side of the multi-family market also has significant implications. With much less new housing stock coming onto the market, the situation is that more potential renters are left are vying for exiting apartments.

For investors with the capital and will to make multi-family acquisitions, the current situation is good news. The double trend of declining values and strong performance by multifamilies is creating a situation where attractive deals and bigger cash flows are a reality. The long-term picture is less certain however. Increasing inflation (e.g. higher costs of food and fuel) and negative employment pressures will have a lot to do with where the demand for apartments goes from here.

While it’s conceivable that job cuts and higher cost of goods may lead to households coming up with creative methods to reduce the cost of living (e.g. doubling-up in apartments), my view is this: Apartment building operators will continue seeing the benefits from the increased demand for apartments for some time. The upshot of this trend will not be negated by a potential slowdown in demand and its effect on how renters will manage their living arrangements.

Given this, I submit that even with the unstable economic conditions, it’s more likely that the multi-family investor will come out ahead than if they never took the plunge at all. So, if you’re in the market now or are thinking about getting in, I’d say go ahead and get you a multifamily investment property today!

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