Multifamily housing: Flying under radar as attractive investment option

QuallsBenson Interior of a luxury apartment at 235 Grand in Jersey City.

Albert Lord III is the founder and CEO of Lexerd Capital Management LLC. – Lexerd Capital Management LLC

Real estate is an established investment class that attracts the attention of both institutional and individual investors. One segment of the market, multifamily real estate, is considered to be a dwelling that houses more than one person or family, typically an apartment building, a duplex, quadruplex or town house. Investors like myself buy a multifamily property with the express intent to rent out the units to tenants to generate income.

One unknown fact about the multihousing market: one-third of American households live in these types of rental units. In the last decade, the market has grown to approximately $700 billion in assets, with more than 6 million properties across the country. Rental income from this segment of the market comprises a large part of the U.S. economy, with estimated annual revenues of $180 billion. Despite these impressive statistics, the growth potential of the industry has been overlooked by investors, in large part due to the 2019 stock market euphoria. Not only is the growth outlook for multifamily investing promising, the current economic climate is conducive to investments leading to high returns in the medium or longer term. In fact, several key drivers, including A) demographic changes; B) economic conditions; and C) imbalances in supply and demand for rental apartments make investing in the multifamily space a very attractive proposition.

Demographic changes

Demographics always play a significant role in household formation, but the “traditional household” that we’ve known for decades is changing. Numerous studies report that households without kids; single, not married households; and single-parent households have shifted household composition and family formation. Delaying both marriage and starting a family due to a variety of cultural and economic reasons makes renting a preferred arrangement. Also, millennials tend to prefer renting over buying a property, affording them the freedom to pursue lifestyle changes and employment opportunities whenever they present themselves. As millennials are projected to outnumber baby boomers, a large cohort of these racially and ethnically diverse young adults is expected to be the key driver for new demand for rentals. All of these shifts in household formation and individual preferences have a lasting positive impact on the demand for multifamily housing. A recent study by Harvard University’s Joint Center for Housing studies supports these trends by finding that rental household growth in the 2010 decade has already surpassed the record pace set in the 2000s, and this trend will likely continue in the future.

Favorable economic conditions

Another reason for growth in the rental market are the current favorable economic conditions. Data collected on employment, wage growth and income levels of younger workers clearly points to an increased demand for rental housing. Low unemployment, moderate wage growth and modest levels of income for younger working of millennials all are correlated with higher demand for rental apartments.

Imbalances in supply and demand

To accommodate the increased demand for rentals, you might expect that apartment construction would have taken off. The reality is quite the opposite. Instead, there has been a persistent construction shortage due to a variety of technical and regulatory issues, leading to misalignment between supply and demand for rental units. For example, in order to keep up with demand, it was estimated that the U.S. would need approximately 300,000 units constructed each year after 2010, while only 129,900 units were delivered in 2011 and 157,600 units delivered in 2012. Accumulated past demand for new units offers signs that the trend of reduced supply will continue to persist well into the 2020s.

The time to invest is now

The size and the evolution of the multifamily real estate market provide a good foundation for sound investments in the sector. While the general outlook is positive, having experience and knowledge of specific local market conditions is crucial. For example, rental demand in states like Georgia and Florida are driven by regional economic development, new business growth and immigration flows, with primary drivers, including immigration, tourism, technology and logistics, all trending positive in the 2020s. Rental demand in the Northeast U.S. — and New Jersey, specifically — is more subdued.

A direct investment by an individual investor in multifamily real estate is labor-intensive and requires expertise in identifying suitable properties and creating value. This explains why productive investments are structured in the form of a fund or a real estate management company where several investors participate by pooling funds together to acquire a diversified, often location-specific, property portfolio. An experienced team of professionals efficiently manages the entire process, from acquisition to disposition of properties, ensuring value creation and appropriate oversight. When structured appropriately, a fund-type partnership in multifamily real estate provides steady income to investors and value appreciation from experienced management. If you’re looking for a good diversification tool within a portfolio of stocks, bonds and cash, investment in the multifamily housing sector is a great option. And the time to invest is now.

Albert Lord III is the founder and CEO of Lexerd Capital Management LLC. Lexerd, Summit-based and established in 2006, has extensive experience in land acquisition, real estate financing, golf course construction, apartment to condominium conversions, student housing, residential real estate and multifamily properties.