Managing Partner, Capital Markets at PIA Residential.
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The sacred cow of real estate asset classes has consistently been core assets such as retail, office and Class A multifamily; however, workforce multifamily has historically been a vital performing asset, and I believe it is positioned to rise to the top. Office and retail have been dependable with lengthy lease terms and a growing economy. As asset classes, they have been nearly foolproof. Yet even before the pandemic, it was becoming apparent these asset classes were reaching a potentially unprecedented downturn. Online retailers’ success and the ease of remote work were beginning to cause significant disruptions to these asset classes’ attractiveness. As a result, I and my team are currently anticipating the beginning of a golden age for multifamily investments.
Effects Of Technology On Real Estate Are Not Being Underwritten
In a previous Forbes article, The Impact of Technology on Real Estate, I discuss the correlation between technological advances and real estate sectors. I created Futurealogy.com to track these correlations and catalog relevant news that spreads awareness to the potential impact and additional risk that must be considered. In doing so, I quickly realized these effects typically strengthen multifamily as an investment and hinder other asset classes.
As we witnessed during the “Uber or Amazon Effect,” many were still keen on retail and office investments even though it was clear that the shift to more defensive assets would start attracting the ‘smart money.’ Fast forward to today, after nearly a year of the pandemic, this trend has been quickly accelerated and is ushering in a historically attractive environment for multifamily investments. This immense opportunity for multifamily is underpinned by the chronic undersupply of affordable apartments.
Thirteen years ago, we experienced another massive economic shift – the global financial crisis created an enormous downturn for nearly every investment asset class and the overall economy. The situation also created adversity for multifamily property owners and operators dealing with tightening lending standards, foreclosures and tenants losing income and savings. However, demand for affordable apartments significantly grew as homeowners continued to lose their homes.
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What Made Us Confident To Buy When The Economy Was At Its Worst?
My partners and I recognized the massive dislocation the market was going to face and established PIA Residential, a vertically integrated real estate firm to acquire, renovate, reposition and hold these single-family and small multifamily properties. While many homes were in foreclosure, people generally paid their rent, especially in the workforce housing sector – those who lost homes became new renters. As the market stabilized and recovered, the demand for affordable housing did not decrease.
Similarly, the current investment landscape shines a light on workforce multifamily. There are quite a few clues we have picked up indicating that this asset class has the positioning to produce outsized risk-adjusted returns. The golden age for multifamily has begun as investors seek stable cash flows that can survive downturns and are laden with risk mitigation qualities. Here are some of the clues to this dawning age.
During Recessionary Periods, Workforce Housing Outperforms A-class Properties.
• Workforce housing assets intrinsically mitigate risk with defensive characteristics.
• Class B and C multifamily properties often remain leased up, creating stabilized cash flow.
• A shortage in supply of affordable housing units varying in severity based on location.
• The growing cost to construct new supply incentivizes developers to focus on Class A properties that generate higher market-rate rents.
The risk is not eliminated, especially with eviction moratoriums and wage losses for many tenants, posing hurdles for many multifamily owners and operators. However, we have seen that occupancy rates, collections and rent growth remain relatively stable.
Demographic Trends Point To Further Stability And Opportunity
The workforce housing target demographic comprises families earning less than a combined $75,000 annual income — nearly 60% of the entire U.S. population. Demographic trends lend to the migration to established tertiary markets. It is increasingly harder for many individuals to make a case for living in congested cities with a much higher cost of living when you can retain or find a new job that will allow you to work remotely. Many millennials and Gen Z working professionals have embraced new career opportunities and living flexibility, further causing homeownership rates to decline steadily. These demographic trends, coupled with the imbalance of supply and demand in many of these markets, are highlighting enormous opportunities.
Multifamily Has A Unique Advantage Over Traditionally Stable Alternatives
• Loan terms, leverage and pricing are typically more favorable for multifamily than any other U.S. real estate asset class.
• Acquisition leverage is usually in the 50%-to-75% loan-to-value (LTV) range.
• One of the most considerable advantages for multifamily is the U.S. government-backed lending programs are not available for other property sectors.
The workforce sub-sector of multifamily assets boasts unique advantages that are causing ‘smart money’ to search for and participate in these offerings:
• Typically the shortest period of rent decline of any real estate asset class.
• First to recover to the pre-recession peak.
• Most prolonged duration of rent growth – post-recession recovery until the next recession.
• Longest runs of sustained rent growth.
• Once stabilized, there is the flexibility to hold the asset or exit the investment for a vast and deep pool of institutional capital.
Agency Debt: Government Provides Liquidity And Creates Stability
Agency debt providers Freddie Mac and Fannie Mae are more than willing to work with borrowers to relieve pressure from the system by:
• Making higher levels of liquidity available through agency lending.
• Actively work with borrowers to prevent meltdown through government relief offered to borrowers.
• Committed to promoting rental housing affordability.
Multifamily Opportunities Become More Attractive
As a deep and growing investment market accounting for over $150 billion of investment volume in 2018 alone, multifamily assets acquire much of their popularity from outstanding risk-adjusted returns and their ability to outperform all other real estate asset classes over the long-term. The current landscape, an abundance of heightened risk factors, and favorable pricing in secondary and tertiary markets create the allure of attractive cash yields and risk mitigation to preserve wealth. I believe the real opportunity lies in suburban secondary markets. With sufficient liquidity – cash waiting on the sidelines – healthy competition for quality multifamily investments will become the new norm as both private and institutional capital reframe which assets are risk-averse and most sought after.
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