Investment Analysis

Shifting Paradigms

Millennials and wage stagnation raising multifamily investments to new heights.

Last year, 43 million American households rented their residences, according to Harvard University's Joint Center for Housing Studies. According to Harvard's Joint Center, this “decade-long surge in rental demand [was] unprecedented.” Whether as a result of wage growth topping out at around 3.3 percent since the Great Recession, the changing priorities among a new generation of households or some combination therein, there are opportunities for investors in the multifamily market.

The two big factors affecting the market in the second half of 2016 are an uptick in overall household formation and increased demand for multifamily housing. Household formation dropped nearly 2 percent  from 2006 to 2008, according to the U.S. Department of Commerce. However, recent incremental growth, in particular household formation outpacing home ownership in early 2015, has reversed what could have been an extended downturn.

This increase in households has generated a mini-boom. From 2009 through 2012, the increase in households has exceeded the housing supply growth. As a result, the multifamily market has been playing catch-up. The implications for this mini-boom, as well as a cooling off period that has begun in certain regions, may vary, but overall the multifamily market as a whole offers opportunities for investors. The following are several points to consider as you evaluate multifamily housing investment opportunities.

Looking at Ripple Markets

In New York City and Washington, D.C., a significant amount of Class A multifamily housing has come online, stabilizing vacancy rates as the supply begins to outpace demand and investors find it harder to gain return on investment. In November 2015, Manhattan apartment vacancies hit their highest in nearly a decade, according to a Bloomberg report. In general, investors should anticipate leveling to decreasing rents as more mature markets become increasingly competitive.

While some of the major real estate markets begin to slow down, however, ripple markets present a growing area of opportunity. With regard to the New York City area, Queens and Jersey City are good examples of this phenomenon.

Evaluating Returns

Many owners and management companies are already planning for a new normal of stagnating rents to become the norm, insisting that projects in progress or planned for the future be priced according to today's rents and without the assumption of a ceiling-less marketplace for renters. By planning an investment in multifamily properties accounting for little to no rent growth, investors can avoid surprises down the road when market dynamics shift in favor of renters.

The good news is that for properties that have seen a leveling of rents, the low rate environment offers significant refinancing opportunities.

Protecting Investments

With the possibility of a rate increase on the horizon, disciplined  investors set themselves up for long-term success, by increasing the equity they hold in projects. In this way, owners and managers are better prepared to absorb the impact of rate changes and fluctuations in vacancy rates.

An added benefit of holding greater equity in individual projects can be greater control over the decision making process. Investors want to look at the depth of each market and the total supply coming in. A question for investors to ask:

  • Should the project be delivered at the same time as everyone else in any given market? Probably not. By keeping an eye on development trends locally, investors can maximize their return on investment on a project-by-project basis.

Searching for Market Demand

While many developers have focused on the luxury market, which according to RedFin rebounded in the fourth quarter of 2015, investors will find abundant opportunities in affordable and workforce housing. Particularly as gentrification has affected local communities and displaced some residents, the need for low and middle income developments is rising. As the future for luxury housing becomes less certain and some regional markets appear to have overbuilt, affordable housing constitutes a bright spot for real estate investors.

In general, looking for geographies that have or are anticipating population or job growth are where investors will want to focus their efforts. In the Southeast, cities such as Charlotte, N.C., and Charleston, S.C., combine good economic policies at the state level with a relatively affordable cost of living. These areas are attractive for both companies and their prospective employees, and contribute to the need for affordable and middle income multifamily development.

Attracting Millennial Renters

Lastly, investors should consider gauging the long-term potential of certain cities based on their walkability. A 2015 report from the National Association of Realtors, found that millennials, more than earlier generations, place a premium on their ability to walk rather than drive to work, to shop, and to entertainment. Investing in developments in communities near transportation hubs offers a good opportunity to tap into early-stage growth markets.

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Gregg Gerken

Gregg Gerken is the executive vice president and head of Commercial Real Estate at TD Bank Group in New York City. He can be reached at

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