Multifamily

For urban and suburban locations alike, the multifamily sector continues to be a sound investment option with well-defined advantages for 2020.  

The Two Reasons Multifamily Remains a Hot Asset Class

February 20, 2020

For urban and suburban locations alike, the multifamily sector continues to be a sound investment option with well-defined advantages for 2020.

In their 2020 U.S. Real Estate Market Outlook, CBRE affirms that, as a result of slower economic growth, 2020 apartment demand is projected to be 20% less than 2019, but will remain sufficient enough to absorb most of new supply and to lower concessions in oversupplied markets.

Why is that?

Let's break down the top two drivers keeping multifamily on top of its game for the coming year.

 

IT'S A TRENDY FIT

While some sectors may struggle to find their footing with changing demographics, multifamily is poised to benefit from the push and pull of boomers vs. millennials.

Boomers are retiring and either staying put in their large single-family homes, or downsizing - sometimes downsizing into multifamily housing.

Millennials are filling up rental vacancies as they dominate the workforce for the first time.

But both generations are increasingly looking to amenity-loaded, convenient apartment living as the residential choice du jour.

 

The Why for Boomers

In anticipation of a "silver tsunami," developers have faithfully and feverishly built new senior housing, only to find that the latest retiring population has adopted technology (smart homes, automated convenience services, mobile health care solutions) to help them stay in place longer.

And in greater numbers, boomers who do choose to downsize, are opting for new, centrally-located, best-in-class apartments that offer comfort and a continued sense of autonomy. 

Between 2007 and 2017, the 55+ demographic of the renter population grew 38% - the highest growth of all demographics.

For the under-54 range, the percentage of renters grew by only 10%.

As they work longer and live longer, boomers are likely to continue favoring upscale urban apartments until they actually need care and assisted living amenities.

 

The Why for Millennials

Millennials are the long-term key demographic for multifamily.

A number of factors keep them from home-ownership today:

  • Overwhelming student debt
  • The increasing gap between millennial wages and home prices
  • Ineligibility (not qualifying for a mortgage loan, inability to afford down payment)

Until they overcome these obstacles, millennials will remain renters, and a target demographic of the multifamily sector.

 

It's a Stable Fit

The resilience of multifamily investments will continue to be a driving force in the growth of the sector.

Three factors work together to make multifamily a profitable choice to protect portfolios:
 

Better Cash Flow

For multifamily, tenants are easier to find, and a good property in a good location rarely deals with too many vacancies. 

While they may not always yield the highest return, with more cash flow from consistently occupied units, multifamily properties are designed to better sustain an economic downturn.
 

Quickest to Rebound

In the 2008-2009 recession, the multifamily sector experienced:

  • The lowest level of rent decline
  • The fastest recovery to pre-recession peaks
  • The longest post-recession period of rent growth, according to CBRE

How's that for stability?
 

Stabilizing Construction Costs

A near 24% jump from 2004 to 2018 has made rising construction costs a hot topic and major concern for developers in the last several years.

But the tides may be changing.

“Construction costs became much more manageable in 2019, and we expect this trend to continue into 2020,” Karl Kreutziger, president of C.W. Driver Cos., told GlobeSt.com.

“While 5-6% yearly increases plagued the industry leading up to 2019, since then more manageable 2-3% increases have been common. This is good news, as the previous, more drastic increases meant that costs could balloon as much as 15-18%-plus between entitlement and permitting. We don’t yet know how commodities such as steel, lumber and concrete will fare in 2020, particularly with pending trade issues and tariffs, but we don’t anticipate as large of increases as in years past.”

 

Takeaways

In urban settings, multifamily developments provide relief in overcrowded neighborhoods and help satisfy the housing demand generated particularly by the growing tech workforce.

In suburban settings, multifamily assets create new communities and an alternative to the sky-high costs of city living.

And whether it's satisfying the changing needs of boomers or the new-musts for millennials, multifamily investment will remain a solid choice for 2020 and beyond, with its defined advantages and positioning for long-term profitability.

If you are looking for a property consulting partner with decades of experience in in acquisition and construction consulting services, we can help.

EBI Consulting provides comprehensive, clearly presented analysis that consolidates all reporting and reflect the real-world costs of multifamily construction and ownership. Contact us today to get the conversation started.