Single family inventory shortages, rising mortgage rates, and other long-term effects of the pandemic continue to fuel conditions that strengthen multifamily market opportunities for investors in 2022.
After the explosive investment activity seen in 2021, market analysts predict the multifamily market is poised for another strong year as we move into 2022; with some key markets that will significantly outperform others.
Both single family and multifamily construction starts are the highest seen in decades, but still barely scratch the surface on backed up demand, and with ample market liquidity, the conditions create another year of healthy opportunities for investment in the multifamily family sector.
Freddie Mac estimates that the single-family housing market is under-built by approximately 4 million homes, and when you include the demand from the renter demographic, some estimates are as high as 8 million. Due to the increased construction costs, low availability of raw land, and the lingering fear of increasing interest rates, building single family homes alone will not correct the supply-chain imbalance.
Currently, the multifamily sector remains a thriving investment strategy that provides a meaningful hedge against inflation while providing strong risk adjusted returns in addition to the tax benefits that come with owning real estate. Demand will remain robust and consistent, with recent projections from CBRE stating that “multifamily occupancy levels will stay above 95%.
Renting and Population Growth Trends
Rents continue to climb, while the US population grows slower than it has in recent years. As the remote working lifestyle has become more appealing, renters are looking for added privacy, space, and amenities; it’s no surprise a large cohort or renters have become interested in exploring more lifestyle-oriented submarkets or moved from higher-cost metros. Renters moving from major metropolitan areas create the ‘perfect renter’ scenario as they’re used to higher rents with less space and look to move to larger spaces at a savings or lateral move, which creates an opportunity for submarket asset owners to capture increased per unit value when they can cater to their renting preferences.
Housing and rent prices are increasing steadily with the national median rent growing by 11.4% in 2021; a trend likely to continue into this year. Per Jaspreet Singh, founder of Minority Mindset, “Inflation is turning America into a renter nation,” he said. “As housing costs go up, more Americans will choose to rent rather than own. As inflation destroys the value of the dollar, real estate will continue to appreciate, and rent prices will continue going up. If you own the asset, you benefit from inflation.”
Studies show that the US will set a record with an estimated 400,000 new units coming to market this year; a quarter of those are in the Sunbelt. As proof of modeling, our team at Lucern Capital Partners reflects on our recent disposition of Nevin Place Apartment in Charlotte, NC where we saw these same conditions help our LPs net returns above 30% IRR at an approximate 1.9 times multiple in just under 36 months.
Threats and Takeaways
The biggest threat, investors say, is the continued rise of interest rates. The government has signaled that we will see several interest rate hikes over the calendar year to help ease inflation. In effect, we believe cap rates will continue to move up slightly, slowing the compression that drove record valuations. While capitalization rates may not continue to compress at the same rate as they have over the last few years, a very competitive investment landscape and liquidity in the capital markets will keep capitalization rates at or near historic levels.
Being a diligent and thoughtful investor during these times is more important now than ever. There remains a lot of value-add multifamily opportunities, mostly due to aging housing stock and a shortage of available housing. The spread of cap rates and cost of debt will still be wide enough to service investors with a year similar to 2021.
To learn more about Lucern’s multifamily opportunities, visit our portfolio page.