Multifamily sector is red hot for investors

Housing may get the spotlight, but there's another market paying off big time

Multifamily sector is red hot for investors

With most of the attention being placed on single-family homes against a backdrop of soaring values, the multifamily sector might be overlooked by some. Yet a new study shows multifamily investors are seeing extraordinary returns, particularly in the southern portion of the US.

SitusAMC – self-described as the leading provider of innovative, trusted solutions supporting the entire life cycle of real estate finance – reports that multifamily investment returns reached record growth in the third-quarter of 2021 as rents grew to all-time highs.

Jennifer Rasmussen (pictured), vice president of SitusAMC Insights, told Mortgage Professional America she had to check her own math given the surprising findings. “When that data started pouring in, it was so mind-blowing that I had to go back and double-check,” she said. “You think this can’t possibly be right,” she remembered thinking. “Somebody has added an extra zero in terms of the basis point change and rent growth somewhere.

“But they were correct. And what was staggering about it is that it’s not just one metric. It’s not just that, well, quarter-over-quarter changes in rent growth are at record highs. But it was across more or less all of the metrics: Absorption is really high, which is people moving into the existing stock; the returns are exceptionally high; prices for properties are high as well. That signals just a very high, in-demand from an investor’s side, market. It was just staggering compared to the records that were there. We’re talking percentage points above what the high ever was in terms of rent growth or return.”

Stated simply: “The multifamily sector is really red hot,” she said during a telephone interview. “And when I say that, it’s not just that the returns are exceptionally high – record-breaking highs – it’s what we call the underlying fundamentals of the market are very strong. There’s a lot of tenant demand for the multifamily sector, and at the same time there haven’t been a whole lot of what we call completions, or essentially new construction, that’s been going on. So, you don’t have an oversupply issue.

“I think all this really bodes well for how the apartment sector is going to perform over the next year. I think it’s going to be one of the standout sectors. Limited supply and high demand, and we expect to see high-rank growth.”

Among the report’s most salient points are:

  • Third-quarter multifamily capitalization rates plunged to 4.5%, the lowest level in history, and nearly 180 basis points below their long-term average (LTA), according to SitusAMC Insights, the data, analytics and research division of SitusAMC.
  • Apartment returns, as measured by the NCREIF Property Index (NPI), shot up 290bps from the second quarter to 6.5% — a record high. The sector recouped its pandemic losses within two quarters and its performance has risen steadily since, increasing by over 600bps from a year prior. Returns stand 450bps over LTA.
  • Metropolitan statistical areas (MSAs) in the Sun Belt — including Las Vegas; Phoenix; Riverside, California; and Tampa Bay, Florida — showed some of the highest returns, as did Charlotte and Raleigh, North Carolina, and Memphis and Nashville, Tennessee.
  • Garden apartments nationwide accounted for a record 8.7% in returns, up 330bps from the previous quarter and 740bps from the third quarter of 2020.
  • In the South, garden apartments skyrocketed to 9.5% returns, over 700bps above LTA. High-rise apartments in the South scored their best performance in over two decades while low-rise apartments performed the best in 11 years. The average high-rise return was 5.5%, 350bps above LTA, while the average return for low-rise apartments was 6.4%, more than 400bps higher than LTA.

“Capitalization rates for national, institutional-quality properties generally compressed over the last three years, but the COVID-19 pandemic accelerated the trend,” Rasmussen said.

Among the reasons for high returns has been an influx of new residents moving into certain areas, according to the report. The Phoenix market, for example, experienced the largest increase in household migration nationwide during 2020, the report found. The city also tied for the top spot in total migration with California’s Inland Empire, which benefited from an influx of residents moving east from Los Angeles to Riverside.

Concurrently, capitalization rate compression was greatest in Phoenix; Tampa, Florida; and Charlotte, North Carolina. All three markets experienced a more than 100-basis-point decline from the prior three-month period.

“We call them the sunbelt market affectionately,” she said of the most notable investment bright spots. “These would be markets in the South and Southwest. By name, some of the ones that are performing best – and expected to continue to perform best – are Phoenix and metros in Florida like Tampa and Fort Lauderdale in the south Florida area. Also, we’re seeing Riverside-San Bernardino. So really the southern part of the US is performing exceptionally well.”

Another factor attributable for the explosive growth in multifamily is that many are being priced out of the housing market against a backdrop of ever-escalating home values, Rasmussen said.

“Gosh, those home prices are skyrocketing,” she said. “It’s just mind-blowing. People have to live somewhere. Even though a lot of people want to get into the single-family market, they’re just priced out of it. Especially the Millennials who have been priced out for a long time.”