Multifamily Investors Seeking Higher Yields in Smaller Properties (& Markets)
Recently, National Real Estate Investor (NREI) published a piece on how investors in the multifamily market are being forced to seek opportunity away from larger markets and in smaller properties – often leading to workforce housing. As we've written before, workforce housing is seeing a large demand while Class A properties rents have stagnated and also come with a heftier initial investment price tag. According to the NREI piece, there is competition across the board as multifamily investors continue to seek the right property at the right price – but there's plenty of good news for property hunters, too.
NREI data shows that investors are taking relatively low yields on their deals, despite rising interest rates that are expected to climbb (and which we've covered previously). According to the NREI information cited, the last two years have had roughly the same level of investment activity, with only a 4% difference between 2017 and 2016. The experts referenced in the NREI piece assessed the data from the early part of 2018 and anticipate that this year will follow suit with a similar level of multifamily volume. NREI even quotes one expert as saying that we're still at a high level of investment “velocity” in 2018.
NREI also cites the high price overall for apartment properties, and how these high prices are suppressing yields – despite the offsetting factor of rising rents. They note that with interest rates rising, eventually this combination will affect the yields investors are willing to accept. Cap rates, they note, for now are at an all-time low. Rising cap rates hinge on a variety of factors like rising interest rates – both long- and short-term rates and one expert is largely concerned with monitoring the 10-year Treasury.
Rising rents, lower yields in crowded markets, and lots of competition mean that to find a good deal, investors must be savvy and look for potential in other areas. Workforce housing in smaller markets can provide those opportunities and the NREI piece noted that many investors are picking up on this segment of the sector.
The NREI piece points out the good news for multifamily investors: construction delays have helped prevent an oversupply in the market, and potential tax reform worries were allayed when the tax reform that passed resulted in favorable conditions for the apartment industry. One source in the article says less “trophy assets” are trading – and that workforce housing is drawing more investors. Overall, the outlook is bright: investors may not have the easy find with the high yield but searching smaller markets for something like workforce housing may result in a solid investment in a competitive market.