Investing in Multifamily Real Estate

November 8, 2022
multifamily real estate investing
Posted In: Market Commentary

Why Invest in Multifamily Real Estate?

The multifamily asset class occupies a growing share of institutional investor’s portfolios and is top of mind for many individual investors looking to capitalize on trends that surfaced during, or have been accelerated by, the pandemic. In this article, we look at why we believe it is a particularly favorable time for the sector.

Key Takeaways:

  • Multifamily properties have dozens or even hundreds of individual rental agreements, minimizing vacancy exposure during economic downturns.
  • Multifamily has predictable and available financing, given the protection of Fannie Mae and Freddie Mac.
  • As home values continue to rise, many would-be owners will be priced out, and demand for multifamily housing should remain strong.
  • Better depreciable life benefits (from a tax perspective) relative to commercial real estate (27.5 years vs 39 years)

Multifamily provides consistent cashflow

As of this writing, inflation is at a 40-year high.1 This may sound concerning, but what does it actually mean for multifamily real estate investing?

While office, industrial and retail properties typically have only one or a small handful of tenants locked into long-term leases, multifamily properties often have dozens or even hundreds of individual rental agreements (1 for every unit) averaging 1-year in term, with tenants turning over on a rolling basis. This arrangement provides downside-protection by minimizing vacancy exposure during economic downturns. On the other hand, consistent turnover of leases in a multifamily property allows management to gradually ratchet up average rents in accordance with prevailing market rates and commensurate with the rate of inflation.

For more on how private real estate can serve as a hedge against inflation, please see this article.

Multifamily exhibits low volatility

Peter Linneman, the principal of Linneman Associates, as well as the CEO and founder of American Land Fund and former professor at Wharton School at the University of Pennsylvania, recently described multifamily as a relatively safe investment.2 According to Linneman, multifamily has one truly unique advantage over other asset classes: the protection of Fannie Mae and Freddie Mac financing, which is predictable and readily available to borrowers large and small.2

“Multifamily has better depth and predictability of capital than any other sector. And in that sense, it is unambiguously safer.” — Peter Linneman

For context, federal agencies and government-sponsored entities hold roughly 50% of the total multifamily debt outstanding as of Q2 2022.3

It’s also worth noting that since housing is an essential function, multifamily tends to be less impacted by fluctuations or structural shifts in the economy. As a corollary, we could say that multifamily should be more resilient through market cycles. This holds true empirically: multifamily has yielded the best risk-adjusted returns since the inception of the NCREIF Property Index (NPI) in 1988.4

Multifamily Demand Remains Strong

As of Q4 2020, the U.S. had an estimated housing supply deficit of 3.8 million units, according to researchers from Freddie Mac.5 The strong demand for this limited supply of housing has contributed to the skyrocketing cost of single-family homes, particularly at the “entry level” for first-time homebuyers.

This affordability gap was further exacerbated during the pandemic. Many renters who would be inclined to homeownership could not afford to do so. Some young adults even moved in with their parents, albeit temporarily. Given the high cost of homeownership and the expected increase in household formation, there’s every indication that demand for multifamily housing will remain strong.

Multifamily Investment Case Study

EquityMultiple’s Real Estate Team communicates with Sponsors around the country and our Asset Management Team provides regular portfolio updates for our investors. Most recently, we exited three investments in Q3 2022, one of which was a 322-unit multifamily community in the Fall Creek submarket of Houston. To summarize: 

  • The sponsor procured attractive bridge debt financing, and planned to exit the investment after three years at maturity of the loan, and after pushing rents and streamlining operational expenses. 
  • Following execution of the business plan, the sponsor received a compelling offer from a 1031 buyer, 49% higher than the original purchase price. 
  • EquityMultiple distributed $1.88M in profits to our investors for a net realized IRR of 117% and a 2.5X net equity multiple. 

2023 National Multifamily Investing Outlook

As Northmarq notes in their recent mid-year outlook, buyers and sellers are expected to undergo a period of price discovery in the coming months, as all parties adjust to the reality of higher borrowing costs and the potential for a slower pace of economic growth.6 That said, we expect rents will remain high, and vacancy rates relatively low, albeit with some variation across specific markets—good news for multifamily investors who can wait out current market volatility. 

For investors who are just now looking to diversify into multifamily, note that downward pressure on prices likely presents buying opportunities. While we may see a slight slowdown in activity going forward, our long-term outlook for the multifamily sector as a whole is largely positive. As market conditions continue to fluctuate, we are committed to: 

  1. Pursuing new investments that may be a fit for our investors,
  2. Tracking operational and financial performance for existing investments, 
  3. Evaluating asset performance to flag potential risks as well as opportunities, and 
  4. Performing asset valuations for refinancing and other exit strategies.

The Bottom Line

At EquityMultiple, we believe multifamily investing still offers investors a potentially compelling investment thesis. For investors who are not risk-averse, now is an opportune time to consider allocating a portion of your portfolio to private multifamily investments, which present the opportunity to capture potentially higher returns than other alternatives today. For more insight into the full spectrum of both alternative and traditional investments, please see our recent Guide to Alternative Investments.

EquityMultiple makes it easy to invest in multifamily real estate projects from experienced sponsors. If you have any questions about multifamily real estate investing, please feel free to schedule time with Investor Relations or sign up for a free account to start investing today.

1Source: Bloomberg (as of October 13, 2022)

2Source: Bisnow (as of October 6, 2021)

3Source: Mortgage Bankers Association (as of September 20, 2022)

4Source: Clarion Partners (as of June 17, 2021)

5Source: Freddie Mac (as of May 7, 2021)

6Source: Northmarq (as of August 25, 2022)

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