10 Reasons to Invest in the U. S. Apartments

For a while now apartments have been showing signs of a healthy growth in every stage of the economic cycle. Several factors contributed to its success, be it the demographics, market, or lifestyle shifts. 

In this article we take a look at 10 major reasons that caused multifamily sector to establish itself as the rock-solid investment. 

1.      Demographics continue to favor renting.

The prime renter age group - 20-34 years old – is still increasing in size. While the millennials are getting older, their inclinations for renting have not changed. On the top of that, generation Z, which is the generation born right after the millennials, is following the same path. Since these renters are just entering the market, they keep things bright for the multifamily investors.

Due to these trends, homeownership rate could rise up to 64% according to the CBRE’s research. The current statistics show that homeownership rates among 25-29-year olds was 32% in 2017, and 46% among 30-34-year olds the same year, which is well below the national average of 64%. 

This notion is supported by the baby boomers’ tendencies to downsize and choose apartments and other independent living rentals over housing once they retire. 

2.      There is significant pent-up demand for apartments.

The number of young adults living at home has continued to increase. This “boomerang” effect developed during the Great Recession as new graduates were facing shaky job market. 

However, given the economic development toward stable jobs and wage increase, these estimated 3 to 4 million people could become potential renters. This is a significant amount to accelerate the demand.

3.      Barriers to homeownership are high.

Younger households are burdened with high levels of student debt. According to the Federal Reserve Bank of New York, student loan balances held by those aged 30 and younger have increased by more than one third over the past 10 years. This decreases the possibility of saving up for the down payment for the house. Additionally, student loans are quickly escalating to 10% of the total household debt, which is almost double the rate from a decade earlier. 

4.      Lifestyle changes support apartment demand.

Many younger adults like the flexibility renting offers them when it comes to geographic mobility and new job opportunities across the country. Also, apart from delaying marriages, the overall number of singles is increasing. Data shows that the average of first marriage in the U. S. has risen to 29.5 years old for men and 27.4 years old for women, both up a couple of years since 10 years ago. 

5.      Apartment construction has been concentrated in class A “renter by choice” product.

It is no secret that apartment construction has been booming in recent years, but not everyone might be aware the most targeted areas for multifamily development have been the cities’ trending neighborhoods such as downtown and large central business districts. Younger workers desire prime locations and that comes with a price tag. This indicates that overall renting is more of a preference than necessity.

6.      Apartments have strong investment characteristics.

Apartments have many favorable investing characteristics that account for high cash flow yields over the cycle. 

First advantage that apartments have over other commercial properties is a short-term lease of one year. Therefore, leases can respond quicker to the market shifts. Also, supply adjusts faster as multifamily developments takes less time to complete than other establishments. Both factors enable market to reach equilibrium more rapidly in proportion to raising rents and occupancies.    

Furthermore, apartments also have lower capital expenditures and lack tenant improvement and leasing commission requirements of other property types. This provides for a higher proportion of net operating income that is distributable as cash flow. 

In addition, investment liquidity is strong, which provides investors with the benefits of high-quality shares in apartments. This is evident in the increasing number of foreign investors entering the multifamily sector. 

7.      Apartments tend to outperform in economic downturns, providing a defensive investment strategy for investors.

Past recessions have proven that apartments are less sensitive to the duration and severity of the economic downturn. According to the Real Capital Analytics’ Commercial Property Price Index (CPPI), a widely used benchmark of property values, apartment values fell 32.2% during the global financial crisis, and it took 47 months for the full recovery. Core commercial property, on the other hand, fell 36.6% and it took 78 months for full recovery. 

8.      Apartments are likely to perform well in either a stable or rising interest rate environment. 

If interest rates remain low, apartment investors are likely to continue to benefit from low financing cost. But even if interest rates increase, investors can still expect to benefit, especially if the increase is caused by inflation. It can be achieved with the following scenarios:

Property effects – A rise in inflation will lead to higher asset replacement costs. This in turn restricts new supply, since higher rents are required to spur additional development. Over the long term, apartment rents have tended to outpace overall inflation rates.  

Financial effects – Higher mortgage rates cause lower housing affordability and more rental demand. While households tend to fall during the periods of weak economic growth and rising interest rates, apartment demand is offset by lower homeownership rates. 

9.      Tax reform makes renting more attractive.

CBRE-Econometric Advisors recently completed a study that indicates the tax benefits of renting vs. buying a home will increase in 29 of the 35 largest U. S. markets. Limitations on state and local tax deductions, as well as the loss of the mortgage interest deduction on home purchases of $750,000 or more, will marginally impact the cost of housing in high-cost markets and have negligible impact on population flows.

The new tax plan’s increased standard deduction of $24,000 for a married couple provides renters in many more markets with benefits previously enjoyed only by homeowners.

10.  Well-located suburbs offer investment value.

As mentioned previously, while construction has increased, it remains much more limited in suburban areas. As a result, suburban apartment rents have outperformed. 

Furthermore, according to the CBRE Cap Rate Survey, the national average suburban, Class B cap rate is 5.41%, while the comparable cap rate for infill locations is 5.14%.  Although spreads between suburban and CBD cap rates have compressed in recent years, the suburbs appear to offer relative value.

These statistics are also supported by the fact that millennials prefer to move to the suburb once they start a family life, which creates tremendous opportunity for investors.