The multifamily market continues to outperform other sectors, with acquisitions totaling $35 billion in Q1 of 2018. This demonstrates strong investor appetite for multifamily product as well as high investor activity in the market.
That said, rents are beginning to flatten, with year-over-year rent growth standing at 1.5% nationally, compared with the 2.8% we saw in 2017. While multifamily as a whole remains strong, investors should be aware of what this could mean for the market, and where they can continue to find value.
Finding Value in a Rising Interest Rate Environment
The Fed continues to announce interest rate increases, and investors must look for opportunities to leverage this environment instead of being hurt by it.
For example, at this point in the cycle, many investors should consider locking in fixed-rate financing to ensure low-cost debt on long-term hold properties. In addition, when seeking financing, investors need to align themselves with partners who can help them look at the “true metrics” of the markets they’re investing in. Rather than simply looking at comps, which can be deceiving amid rising interest rates, it’s important to examine the whole picture to understand where value-add opportunities still exist.
Finding Value in Markets With an Influx of New Product
With a surplus of Class A product being delivered, many multifamily owners are concerned about competing with newer properties. That said, because a large percentage of overall demand continues to be driven by middle-class renters, investors can find deep value by investing in Class B and C assets and upgrading them to offer more affordable alternatives to newly built product.
Class B and C properties have become the sweet spot for many multifamily investors at this point in the cycle because these assets continue to offer opportunities for value creation. For example, we helped an investor in Santa Clara, Calif., acquire a Class B multifamily asset in 2015. Less than two years later, the asset sold at a record-breaking price per unit. The seller was able to achieve an exceptional price due to the extensive renovations performed at the property, which increased its value exponentially.
Additionally, as new product floods the market, investors seeking more value should consider diversifying their portfolios by expanding their geographic reach and seeking opportunities in nearby markets. Many multifamily investors are moving to secondary and even tertiary markets to identify properties that are poised for renovation and value creation.
Finding Value for the Long Term
While investment activity in the multifamily sector is on the rise, investors must be careful not to complete transactions for transactions’ sake. Multifamily investment requires a long-term mind-set focused on growing and sustaining wealth.
At this point in the cycle, investors who lock in long-term financing can likely mitigate potential challenges posed by climbing interest rates, and those who invest in Class B and C assets will typically be well-positioned to increase value.
Ultimately, we expect multifamily investment activity to remain strong in the years ahead. Demand for housing exponentially outweighs supply on a national level, and even with current market pressures, investors who look at the whole picture and focus on long-term strategy will make the right moves now to leverage this demand.
By Adam Levin & Robert Johnson