What is your multifamily investing forecast for 2018? I hear a lot that a correction is coming in multifamily Investing.
- Is it really?
- Where, in what markets?
- How long will it last?
These questions have been on the minds of a lot of multifamily Investing groups and multifamily syndicators.
The market has been strong for about eight or nine years. Usually the market cycle lasts about that long too.
I wanted to share my perspective on it. It is very hard to predit the future. Especially in the times of uncertainty with talk of possibly lowering of tax rates, and cutting out of social programs and small business tax breaks all in the name of economic growth.
So it is very hard to project the multifamily investing forecast for 2018 due to 5 current factors.
- Many markets across the nation have peaked.
- The rents are at the highest level in years.
- The vacancies have been low.
- There is less product for sale on the market
- The competition is fierce.
But the savvy and tough investment groups always find ways to acquire the right properties even in the heated markets.
One of the keys is to look at B and C properties in my multifamily investing forecast
I have been fortunate to create a niche markets in Texas and Georgia.
I have been able to do 12 syndication acquisitions in the last couple of years. We have purchased C properties and B properties in growth markets through developing great relationships with top brokers and making quick decisions when opportunities arose.
Just recently, Multifamily executive reports, “Class B and C multifamily housing will have the greatest potential for high returns in 2017 and well into 2018.”
Do I agree? Yes, I definitely think so.
For the last nine years, my companies and other multifamily investing groups have enjoyed healthy cash flow returns along with the equity gains in the C+ and B class assets in B and A areas. In our companies, we have always gone after the jobs, and the emerging smaller markets outside of the large metro areas where there is path of progress and job market is healthy and growing. Below is a chart from Marcus & Millichap.
Is Class B and C the way to go?
Multifamily executive reports that what is driving this is, “the oversupply of Class A communities in combination with a drop in demand, the rising cost of homeownership, and millennials entering the market by the millions.
In the midst of this trend, foreign investors have begun to take notice and make their own plays on U.S. multifamily real estate.
As we all know, the U.S. is becoming more of a renters nation, the millennials are loving the “portability” aspect of living. They like living in B class apartments with nice aminities, no need to mow the lawns or take care of the swimming pools etc. and no need to drive to the fitness club because all of this is contained at the dwellings.
The growth of this segment of population as shown in the above graph tells the story.
I predit the market for B class apartment communities will be quite healthy for a long time.
Multifamily executive says, “Class B and C properties also allow real estate investors opportunities to enjoy a significant lift in NOI by making small property improvements. Examples of these value-adds include putting in communal clubhouses, adding dog parks, putting cafes, media centers and offering community events. These upgrades to B and C apartments can be relatively inexpensive to implement yet can generate higher rents, leading to rapid ROI growth.”
My present companies, Moneil Investment Group and Moneil Management Group have been bringing value to C and C+ communities and converting them to high occupancy Class B assets. The investors really like the fact that along with the cash flow returns they are enjoying the forced appreciation of their investment in equity gains.
Cafes and media centers are examples of value-adds
Millennials love apartments
The generation has been dubbed Generation Rent and is expected to continue driving apartment demand through 2024. Experts assert millennials are interested in homeownership, but are too laden with debt to pursue it. Their interest in owning a home will become more apparent as they continue to age, pay off debt, get married and start families — but this is still a long way off for the majority of the generation.
Meanwhile, Class B and C properties are attracting a wide demographic, from working-class individuals to millennials entering the market to downsizing baby boomers.
These properties are typically 15- to 25-years old and are located in desirable buildings in well-established middle-income neighborhoods. They tend to offer residents the most bang for their buck, attracting renters in a down economy.
Why apartments are booming with Baby Boomers
There is a rental-demographic that’s feeling quite young and spry. And old age isn’t something they will be thinking about for years.
It’s the Baby Boomers, most of whom will turn 65 by 2030. Every single day, for the next decade, about 10,000 Baby Boomers will become 65 years old, retire and turn their attention to where and how they’re living.
Born between 1945 and the early 1960s, this is a demographic that’s going to drastically redefine the composition of the U.S. population. In fact, 18 percent of all people living in the nation will be aged 65 and above in the next decade or so.
While they’ve been homeowners for the better part of their lives, recent housing studies show that approximately over the last 10 years, Baby Boomers have become the second biggest rental demographic, right after the millennials.
According to data coming from Harvard University’s Joint Center for Housing Studies reveals that between 2004 and 2013, renting saw a rise among people aged 50 to 75. Today, most renters are around 40 or older.
Despite being a strong demographic that’s leaning more and more towards renting, the Baby Boomers haven’t received quite the same attention as the younger millennials.
Property managers, landlords and real estate investors alike have been exploring ways in which they can make their rentals appeal to the more dynamic millennials. Fortunately, the things that the Baby Boomers and millennials want aren’t too different. They want a sense of community fused with interiors that are suited for their specific needs.
Great opportunites lie ahead for more senior living facilities and nice, well-cared for communities to meet their demand.
How about foreign investors in 2018 – what will we see in multifamily investing forecast for 2018?
Multifamily executive reports, “More foreign investors are seeing this potential in the U.S. multifamily housing market. According to an analysis by Real Capital Analytics, as reported in National Real Estate Investor, foreign buyers poured a record $91 billion into U.S. commercial assets in 2015, $19.6 billion of which was invested in apartment communities. And through June 2016, foreign buyers invested a record $5.1 billion in apartment communities.
“To put that number into perspective, over the course of the previous decade, foreign investors averaged a mere $5.4 billion in multifamily product annually. We’re seeing much of this money coming out of China, as well as Canada and Mexico. Additionally, in the commercial real estate industry, we’ve begun seeing an influx of investors from the Middle East and South Africa, many of whom are pouring money into multifamily properties. The reality is that the combination of a pro-deregulation president and potentially unstable economies abroad is making the current U.S. market especially attractive to investors from overseas, therefore drumming up foreign investment in the U.S. real estate market.”
Multifamily on the rise
Multifamily saw the next biggest inflow of overseas capital, with a broader subset of foreign sovereign wealth and pension funds increasing their exposures to the space.
“While some overseas investors are focused on suburban investment strategies due to current urban development levels and pricing, others are seeking to align U.S. multifamily with office exposure from a market and sub-market perspective,” says JLL Americas Research Director Sean Coghlan. “We will see more transactions from these groups, likely at scale, in non-conventional structures and with strong domestic sponsors. However, selectivity will remain the norm.”
With pricing elevated in primary markets, and targeted opportunities remaining limited, foreign investors will continue to expand the scope of their U.S. real estate investment strategies by both asset type and location, including moves into selected non-primary markets.
What about rates of rent growth in 2018?
This statistic presents a forecast of multifamily rent growth in the United States from the second quarter of 2017 to the fourth quarter of 2018. It was expected that the multifamily rent growth would amount to 6.2 percent in the fourth quarter of 2018 in the United States. Multifamily real estate refers to a housing structure where multiple apartments are contained within one housing unit, or when several buildings form a larger complex. In the United States, 397 thousand multifamily houses were started in 2015. An average size of such a housing unit was 1,074 square feet in that year.
As outlined above it looks like a healthy rental growth across the quarters in 2018. I definilty say that the rental growth depends on so many other factors and the forces behind the demand in local markets.
Overall, I see a bright future for multifamily Investing in 2018 and beyond!
About the author:
Vinney Chopra is the Founder and CEO of Moneil Investment Group and President of Ideal Investments Group. His latest accomplishments include acquiring 12 multifamily assets in the last 28 months, worth $132 million. His last two syndications were sold out in just a few hours, and one in 36 hours raising $4.7 million and another one $6 million in eight hours. Between the two syndication companies he founded, Vinney’s team is controlling over $200 million worth of assets. He is a mechanical engineer. After entering USA with $7, he graduated from The George Washington University with Master’s in Business Administration in Marketing, he shifted his focus to marketing and motivation. He was a professional fundraising consultant and motivational speaker for more than 35 years with a wonderful private company. Vinney and his wife started their real estate investments in 1983. He currently owns single-family homes and multifamily units in Texas, California, Atlanta, Arizona and India. Many times, people call him “Mr. Enthusiasm” or “Mr. Smiles.” He likes to bring great value to everyone he comes in touch with.