Outlook for the Multifamily Sector
Updated: Oct 10, 2019
“The most reliable way to forecast the future is to try to understand the present.” – John Naisbitt
By John Cohen
None of us have a crystal ball. If I did, I really wouldn’t have to worry about reviewing trends, analyzing facts and figures, and making that hard decision about my next real estate investment. If I had a crystal ball, I would know where to invest and where not to invest.
But, I don’t have a crystal ball and because of this, I need to be aware of economic trends, market patterns, and though review of various analytic tools that we use in our real estate investing business. So, we have no choice but to look at historical patterns and to try to figure out what is going on in present time. Understanding the patterns and trend of the present time allows us to project or forecast the future of our investments.
There are different ways to learn information about the present outlook in multifamily investing. You can go to local meetings and learn invaluable information (we had Eric Preto present on the impact of the new tax law in January, 2018 for example) or you can go to conferences to network and hear information from like-minded investors. I was fortunate enough to attend and even speak at a few conferences this past year. Generally, the larger conferences provide a forecast of valuable information on the economic factors and trends within the multifamily market.
Here are some of my “take-aways” from the conferences and meetings I recently attended:
The general consensus is that investing in the multifamily sector remains strong. While the higher returns realized a few years ago may be more difficult to find, overall the stability and continued need for solid rental property remains. In fact, some project that the recent volatility in the stock market may actually drive investors away from stocks and into real property investments.
Annual rent increases will continue to be market driven. There is the possibility to continue to “push” rents for those properties that have a value-added component, but it is anticipated that with properties that have stabilized, the rents are going to begin to normalize or settle at around 2 to 5% per year, depending again, upon the local market conditions. Often, the greater demand in a specific area, the greater the potential for increased rent. This is important in considering investment goals related to cash flow.
Recent economic indicators have hinted at inflation. This has accounted for some of the volatility within the stock market as of late. While there are hints at inflation, interest rates remain relatively low. We have been able to recently secure a Freddie Mac loan at 4.51% which allowed us to bid competitively for a value-added property. It is suggested that there may be some movement in commercial interest rates, but it is anticipated that this movement will be minimal, thereby allowing us to continue our current investment approaches and strategies.
The revisions to the tax laws may actually benefit real estate investors through changes in depreciation and pass-through provisions. It is important for everyone to contact their accountant to discuss the changes and appropriately plan for this year.
New construction and development costs remain on the rise. There are some areas where new construction may actually begin on the verge of flooding certain markets. This may be especially true in A property sectors.
In our experience, property sales continue to be priced relatively high with fairly low cap rates. Large investment entities, often funded by international investors, are one of the forces behind the increased demand for quality multifamily properties. This combination of factors makes the acquisition of new properties a bit more challenging. While there is still opportunity to find potential deals, it is important to adhere to your investment criteria and resist the temptation to overpay for properties. The numbers have to work. Investors may have to modify or alter their acquisition strategies to focus on a specific niche, market or property type that large development companies may bypass.
Final Word The information received from the different meetings and conferences attended over the past few months seems to forecast both stability and growth within the multifamily sector. With increased demand for multifamily investments, it is even more critical for investors to build a solid network or team of like-minded investors, brokers, property management, and service professionals.
New investors may want to take that leap of faith, take action, and actually invest. Why? Because in times of increased competitiveness, your credibility, track record, and ability to work within a team may help you secure a deal that would otherwise be out of reach.
Feel free to reach out to us, if you want to find out ways that you can take that leap of faith and get involved.