If you are in the apartment building and multi-family space you have probably realized that demand has continued to rise on the renter and investor side of things. This has occurred despite the pandemic that has plagued everyone in 2020. As an investor, I have to admit that when COVID-19 was just beginning in the US I did expect prices of multi-family assets to go down but that has been far from what has happened in the market. Rents have overwhelmingly gone up and vacancy in general has stayed low, in many cases actually increasing the value of multi-family assets. People more then ever are moving into apartments, will this continue into 2021? Let's take a look at the reasons for the strong demand and think about how this could all play out.
As uncertainty continues around the world and specifically the US many people are still afraid to buy homes. Sure the interest rates are low but housing prices are also continuing to go up. In many places the competition is high and people are being forced to pay over the asking price if they even want a chance at getting a home under contract. Along with this people need a nice sized down payment in order to buy a home and not everyone has that right now.
With job and career uncertainty for many, tons losing jobs over the past year not everyone can qualify for a mortgage. This forces more people towards rentals.
More People Demand Flexibility
From Millennials to Baby Boomers people want more flexibility then ever before and renting allows this much more then owning. This flexibility comes in many forms from saving time by not needing to complete maintenance, to not needing to do all the chores that homeownership requires like mowing the lawn or shoveling the driveway in the winter.
Renting also allows people to move more frequently if they desire. With more people working from home then ever before there is at least one less reason to root yourself long term in an area. Instead rent on a 6 month or year long lease to live and explore different areas.
Even Baby Boomers are joining the rental trend. Many wanting the same flexibility but also to downsize out of their larger homes. And why not, it's also a great time for them to sell.
There's a Shortfall of Affordable Housing
If you were to look at the cost of building a new home or apartment you will see that even on the cheaper end of things this cost is much higher then we can purchase an apartment for on a unit by unit basis. It is nearly impossible for builders to make money building affordable housing, as a result you will notice most builders are putting up nicer homes.
Earlier we said that people are bidding up over asking to purchase homes, many times this is on the cheaper "starter homes" that younger people are hoping to snag for their first home. There is a lack of affordable homes and apartments fill the gap.
Building a new apartment building costs over $100,000 a unit, and we can purchase property of the B-C class for around half that price! Believe it not construction costs are on the rise so new homes and new apartments will continue to get more expensive. Because of this we are able to keep rents more affordable then many peoples mortgage would be. This segment of the housing market will always be around and is actually growing as the income gap widens, but as we said in general its too costly to build new for this group of people. As new apartment buildings or homes are built they are targeted to a different audience then the buildings we purchase as investments - the B to C class assets or working class, blue collar apartments.
Vacancy is Low
As owners to B to C class apartments we are lucky to have experienced low vacancy and as owners and investors we need to consider the fact that not all vacancies are created equal. With low vacancy in our chosen asset class (B to C class multi-family) we are able to keep market rents as demand is high.
The chart below shows vacancy rates in terms of rent prices, this covers all of the US and as you can see it shows all apartment price points. Notice that the highest vacancy is by far is in the luxury A class apartments priced at over $2000 a month. There are a few reasons for this and they all fall back to what we already spoke about - financial uncertainty, and high construction costs being the main reasons. The high costs of building force developers to create higher end apartments saturating the market of this style building and leaving a lack of units in more affordable price ranges.
We believe in the B to C class apartment investments. This covers the monthly price range of $500 to $1,000, this of course varies by the area. This is a great price point to be in when considering vacancy as we are in the range of 4 to 6.5%, not bad. Remember, this chart covers the United States as a whole and real estate as an investment should be looked at in the micro level.
When looking at the historic vacancy we you'll notice that in 2020 we are averaging 6.4%, the lowest since the 1980's!
What Does it All Mean?
I need to look into my crystal ball for this one, it is hard to predict the future. But I think we can expect 2021 and beyond to be good for multi-family investors that have made smart investments. We know the reasons that apartments have been a historically strong asset class and I do not see any drastic changes to those things in the next couple years - People will continue to want flexibility, the gap in price between home ownership and apartments will continue to grow, and for one reason or another there will always be some sort of uncertainty.
We still need to be careful when investing. Be sure to look at what type of real estate is it, what asset class and where is it located. Getting these 3 things right will ensure you have made a good investment. The criteria of a good investment changes over time so smart investors always need to be on the look out, they have to analyze market trends, cycles and demographics when looking for the best investment out there. Be sure to look into all aspects of the property, not only taking into account income and expenses but also look at the capital expenses it may need during your ownership, flaws in management and all of the value add possibilities there are.
After we take everything into account when investing, I think good multi-family investments will continue to be good investments in the coming years. I also think there will be plenty more opportunities to buy in 2021, it will just take a lot of work to find the good opportunities and a lot of work to confirm for yourself that they are indeed what you expect. Don't take someone's word for it when presented with an opportunity, do your own research on the macro and micro level. Be sure that your money is safe and do what you can to have it working for you for years to come!