The Rental Market & Multifamily Just Keep on Booming

The National Multifamily Housing Council and the National Apartment Association commissioned a study of apartment construction and its economic effects, and the results show strong activity.  The study covered activity in 2013, and the headline reads “…the apartment industry and its 36 million residents contributed an impressive $1.3 trillion to the U.S. economy and supported 12.3 million jobs in 2013.”

Experts will argue over whether America is becoming a “nation of renters,” but there is no argument about the boom in apartment construction in the past two or three years.  Partly the result of years of low construction after the real estate bust beginning in 2007, the market appears to be recovering quickly.  This is of interest to commercial real estate investors, as there is a lot of multifamily construction going on all around the country.  Where there’s building there’s usually a need for investment to fund it, and there is a lot of building to meet increased rental demand.

The study is based on research conducted by economist Stephen S. Fuller, Ph.D., of George Mason University’s Center for Regional Analysis.  The data cover the economic contribution of apartment construction and resident spending nationally, with regional data for all 50 states .  There is also data available for the District of Columbia and 40 specific metropolitan areas.  Construction, operations of units, as well as spending by residents are all part of the study.

Most visible is the rise in apartment construction.  The building of new apartments contributed $93 billion to the national economy in 2013.  $30 billion of that went directly to paychecks for more than 700,000 construction workers.  Of the metropolitan areas studied, 17 of them each received in excess of $1 billion in benefits from the boom.  Los Angeles lead the group, receiving $5 billion in benefits from the activity.  Others at the top of the list were:

  • Washington, D.C.
  • New York City
  • Atlanta
  • Chicago

From the report, Fuller states: “The construction for multifamily apartment buildings is a significant and growing source of economic activity, jobs and personal earnings in communities nationwide.  Construction has been rising consistently over the past five years.  In 2009, construction starts were at the lowest level ever recorded since records began to be collected in 1964.

Studies show that 300,000 to 400,000 new units are needed each year just to keep up with demand, and since the downturn that began in 2007, construction has been well below necessary levels.  Even with the level of activity in 2013, completions were only about half of those needed, at 186,000 units.

Highlights of the reports are summarized as:

  • 702,000 jobs and $92.6 billion were contributed to the economy in 2013 from apartment construction.
  • Operations of 19.2 million apartment homes supported 1.5 million jobs and contributed $190.7 billion to the economy.
  • 36 million apartment residents contributed $1 trillion and 10.1 million jobs to the economy through their spending.
  • Continuing apartment construction, operation and resident spending combine to contribute $1.3 trillion annually to the economy; $3.5 billion daily.

What’s the take-away for multi-family real estate investors from this information?  We’re still under-supplied with rental units in relation to demand.  We’re still not building enough of them to respond to growth in demand.  The Millennial generation are still not flocking to the new home market, many sharing rentals and others still living at home with relatives.  All of this combines to suggest strong demand into the near future for not only apartments but single family, duplex and tri-plex rental units.

Crowd funding is attracting smaller investors to larger apartment project investing.  However, there should continue to be strong demand for all types of rental residences.  If demand does continue, families will also be forming, and single family homes offer more to the young family than apartment living.  Multifamily investors and small single property investors alike can look forward to some lucrative years ahead.  Of course, a sharp deal pencil and lots of due diligence is also required.  The multifamily and apartment construction markets are contributing to an opportunity rich investing environment.

Leveraged Appreciation

Values of Raleigh Commercial Real Estate don’t have to go up much to provide a healthy return because of something called ‘leveraged appreciation.’

Leveraged appreciation is the increase in the property value when compared to the amount of cash invested in the property.  The leverage comes from the fact that the property has a mortgage that’s being paid from the rents received from tenants.  This means the owner did not have to invest an amount equal to the entire property value.  Instead of investing 100% of the value, the owner only put down a percentage…say 25-30%, and the lender is supplying the rest.  Rents then go to repay the lender.  But the owner still derives the benefit of the appreciation based on the entire value of the property.  This means the return on investment is much higher than just the rate of appreciation.  Or, as it is termed, the appreciation is ‘leveraged’.

The amount of leverage is obviously impacted not only by the amount of appreciation but also by the ability of the owner to get good financing.  The lower the down payment and purchase costs, the better the return on investment will be when the property goes up in value.  A large part of the potential return on an investment comes from this concept.

Commercial Real Estate Vs. Residential Real Estate

Commercial Real Estate in Raleigh NC, for all but the owner-occupant, is solely an investment and the numbers need to make sense.

Unlike residential real estate markets, which are largely driven by whether or not people like or dislike a home, commercial real estate markets are driven by the profit that can be earned by owning the property.  For this reason, being able to understand the profit potential of commercial property is critical to success.

There are essentially three things that determine the quality of a potential investment:

  • The amount of appreciation expected in the property:  Just like any investment, people who buy commercial property are hoping for the value to increase over time.  Part of what a potential investor will analyze is the amount of appreciation compared to the amount of cash they have to invest to own a property.  This is known as leveraged appreciation.
  • The current, future and/or potential earnings of the property:  Income minus expenses should deliver a net profit.  Investors want to know how much money the property is earning or will earn.  They want to compare this to the value of the property, a comparison that is known as the Capitalization Rate, or Cap Rate.  They also want to compare this to the amount of money they have to invest to own the property.  This is known as the Cash-on-Cash Return.
  • The tax ramifications of owning the property.

Subcategories of Office Buildings in Raleigh NC

Three common subcategories of office buildings in dealing with Commercial Real Estate in Raleigh NC  are:

  • High-Rise
  • Mid-Rise
  • Low-Rise

High-rise and mid-rise buildings are typically found in high-density urban markets.  While high-density urban markets also contain mid-rise and low-rise buildings, they’re more commonly found in suburban markets and often comprise office parks.  What might be considered a high-rise in one market might well be a mid-rise in another, since the definition is somewhat relative.

Generally speaking, in major metros:

  • High-rises are considered to be 25 stories or higher
  • Mid-rise buildings are considered to be 7 to 24 stories
  • Low-rise usually describes buildings 1 to 6 stories.

Another subcategory of office space is ‘community commercial’ or ‘mixed use’.

Smaller mixed-use buildings are very prevalent in the older downtowns of small cities and towns.  They’ll typically be two, three or four stories of office space or multi-family, with either office space or urban street retail on the ground floor.  Because the properties are quaint and have become more appealing to many people, you’ll increasingly see newer developments that attempt to mirror these properties.  They’ll often include an office component, a retail component, apartments, condominiums, or even independent living facilities for the elderly.