Home Swift; With homeownership out of reach, multifamily rentals become key investment for the future

For growing share of Americans, home ownership remains out of reach. Interest rates have been at a two-decade high, and the Federal Reserve plans to keep them there until inflation cools. Many Americans are saddled with debt; delinquency rates on credit cards and auto loans are at a 10-year high, more than 43 million Americans owe $1.6 trillion in federal student loans, and the interest rate for such loans just hit a 12-year high. At the same time, housing costs keep climbing higher.

As of February, prices were still rising in 85% of U.S. cities, making it 60% cheaper to rent a home than to buy one in every top metro area. In Austin and Seattle, for example, the monthly cost of buying a starter home is 142% and 121% greater, respectively, than the average rent in each. In Phoenix the average monthly rent is half the baseline required to buy. According to S&P’s home affordability index, homes in more than half of U.S. states are unaffordable to the median household there - for the first time ever.

These trends, while discouraging for aspiring homeowners, are driving an uptick in multifamily rentals. This year, a huge wave of new apartments will be delivered to market. According to CBRE, nearly 500,000 units will be delivered in 2024 alone, with nearly one million more under construction. While focusing on multifamily rental communities is a smart strategy given broader trends, investors must do their due diligence and consider what locations, amenities and experiences matter the most to prospective residents in order to not only compete, but also surpass their return thresholds.

Making savvy investments

Despite high demand for rentals and their cost-effectiveness relative to homeownership, the market is challenging from an investment perspective. High interest rates make it more difficult to acquire financing, while construction costs continue to rise. As a result, investors must deploy their capital in a savvy manner to ensure their target return on investment. This is especially true for high value-added and opportunistic-level investment returns, where high costs and interest rates can drive returns down regardless of risk. With higher costs, it’s important to choose a market where people can afford to pay more rent—something dictated by a city’s business and demographic ecosystem. Add to this the behaviors that drive desirable areas: Cool and exciting cities can attract well-paying companies who recognize the caliber of talent there, just as an influx of industry can fuel an area’s cultural flourishing and establish it as an “Anchor Economy.”

Identifying places that are or could be appealing hot spots requires research, analysis and tenacity. At the city level, some factors to analyze include weather, transportation (roads, rail, air), infrastructure (including the energy grid),economic draw (job growth), per capita GDP and the presence of Fortune 500companies and dependent companies clustering nearby and lifestyle. Zooming in, a neighborhood can be analyzed using factors like average median income, walkability, public transit access, safety and social life, offering a qualitative review that goes beyond the quantitative measure offered by an area’s Walk Score.

While “live-work-play” has become the watchword of desirable places, there are actually nine reasons why anyone is anywhere, and they are all experiential: live, work, shop, stay (hotels, vacation rentals, etc.), play, learn, heal (care and recovery), watch (theater, sporting events, concerts, etc.) and savor (eat, drink and nourish). The presence, or lack thereof, and cohesion between any of these components determines the vibrancy and desirability of an area -- and the more desirable, the greater the rent potential. Collectively, these components all contribute to the soul of a place, and that soul will have a strong appeal to a customer base that wants a home that reflects their unique character and personal brand. The savvy investor who recognizes the central importance of this dynamic coupled with the location’s sensory appeal to its residents and customers is well-positioned to harvest a higher return on investment.

While the “demographics is destiny” ethos continues to ring true, the reality for investors is much more aligned with the statement that “demographics is data.” Now more than ever, you can leverage resources, such as CoStar, Yardi, and Moody’s Analytics, to detail and analyze a location’s history, view real-time data to gauge what is currently happening there and conduct predictive polling via SaaS applications such as RCKRBX to forecast probable future trends. Investing time in research and critical data analysis can greatly help identify a city or neighborhood with strong upside potential.

And while data is helpful, there’s simply no substitute for firsthand experience. Once you’ve identified a potential neighborhood, spend some time there. Talk to people and property managers in the area. A thorough market assessment triangulates a firsthand perspective with market studies and the input of local property managers. Additionally, the investment horizon must be considered. If you’re an opportunistic investor looking to sell in five or so years, is there sufficient institutional capital in an emerging market for a best-case exit cap rate? The equation changes, naturally, for investors looking to buy, build, and/or hold a property.

Location, location, location

Gateway cities such as Washington D.C., San Francisco, and New York City are extremely saturated, but suburban-urban nodes surrounding these densely populated urban areas have less competition, which can translate to stronger returns. Going just outside Washington D.C., for instance, is a good example. In addition to serving as the headquarters of the U.S. government, Washington D.C. is also home to 16 Fortune 500 companies and has the third-highest AMI in the country. Areas just outside Washington D.C. proper—such as Alexandria, Arlington, Bethesda and Falls Church —are tapping into this wealth while offering residents an appealing lifestyle (a walkable environment, interesting retail and restaurants) without the downside of post-pandemic city living. Put another way, these locations let renters combine the convenience and vibrancy of urban space with luxury lifestyle amenities.

A multifamily property type trend that strikes an ideal balance for residents wanting a more flexible lifestyle and an ideal component of a suburban-urban node is luxury build-to-rent. These properties are designed with homebuyers’ needs and wants in mind but are catered to those looking to rent for affordability and convenience; at core of which are families with young children who want a higher-scale home and similar neighbors than a traditional apartment building offers but are priced out of the for-sale market. One such example is CityHouse Ashburn Station, a luxury multifamily build-to-rent property strategically developed and located in Ashburn, VA, based on key city and neighborhood factors indicating a bright future for not just Ashburn as an attractive area but for the property as a strong fit for many prospective residents’ needs.

This trend is occurring in other urban markets as well, including South End in Charlotte, N.C.; North Hills in Raleigh, N.C.; King of Prussia outside of Philadelphia; Cherry Creek in Denver; and Northside in Austin, all of which are increasingly popular suburban-urban nodes. However, a lot of other factors can affect the region’s potential return on investment. Insurance rates are off the charts in Florida, for example, because of the risk of rising sea levels. Meanwhile, in New Jersey, property taxes are extremely high. In most higher-income urban markets, proffers and inclusionary zoning requirements add to the economic challenge of making an investment pencil. Before investing in a multifamily rental property, it’s important to analyze the area at multiple levels and angles to get a good sense of the short- and long-term prospects, challenges and rewards.

Understanding the money value of time is also important before making an investment. A typical200-unit market rate residential development project usually takes 3,500 man-hours for a team to execute, from sourcing to stabilized occupancy. In contrast, atypical affordable project half that size will take roughly 5,000-man hours to execute given the layers of subsidies adding time and cost. Office conversions are also a huge trend, but only a small percentage of office buildings work for such projects given the variables in play: location desire, submarket rent, building code conditions, floorplan challenges and, finally, unit yield – is the time worth the effort? The multifamily market is hardly a monolith, and different factors affect different geographies and projects.

The bottom line

As things currently stand, the multifamily rental market poses a unique opportunity for investors. Because renter demand is so strong and the reality of buying a home is so limited, it is a prime time to take advantage of slight apartment oversupply by strategically investing in properties situated in attractive locations with resilient economies ahead of new demand. However, identifying an area suitable for multifamily rentals entails proper analysis, thorough due diligence and the ability to forecast a location’s future by understanding its fundamentals.

While there are a lot of challenges facing the multifamily investor, there is also enormous reward to be uncovered, provided you navigate the nuanced market drivers effectively. The key is strategically identifying the right location, project, and amenities to make your investment a success and deliver exactly what it is your customers want.

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