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.

Multi-Family Properties

Multi-family properties can often be outstanding investments.  For this reason, there is an abundant supply of buyers, all of them looking for good multi-family residential property investments.

Because the returns to the owner can be so substantial for a good multi-family residential property, many owners are reluctant to sell unless they get an outstanding price.

As opposed to single-family homes, multi-family properties are intended to be an income-producing investment for the owners.  When a family is buying a single-family home, their decisions are often swayed by emotional factors.  They will often purchase a home that doesn’t completely make financial sense because they really like the home.  Smart investors in multi-family properties, on the other hand, are looking at it as an investment.  They focus on the return that the investment will give them.  In other words, buying or selling is almost completely dependent on the income and expenses, and whether or not the income is likely to rise due to market conditions or real estate improvements.

How Age & Condition Affect Multi-Family Properties

Age and condition are very important considerations when considering a multi-family property to purchase.  One reason is that rents will be reflective of the age and condition.

Newer apartments are often rented for more money.  Older units can have charm, style, and real appeal, or they can just be plain and dated, and the rents will be reflective of the age and condition.

Also, it is not uncommon in older properties to find that tenants have been there for a long time and the rents have not been raised to keep up with the market.  So you need to find out how old properties are.  Most of the time, you can just ask the current owners for the history of the property, but it also never hurts to get city planning records or the property tax records to determine age.

Age and condition are also important because older units require more upkeep, which can erode the Net Operating Income (NOI).

Look carefully at older buildings as they are much more likely to have serious problems.  Some of the problems that may surface with older buildings include:

  • Leaky windows
  • Foundation issues
  • Dated plumbing
  • Dated bathrooms and kitchens
  • Termite and pest problems
  • Life safety deficiencies
  • Mold, lead paint and asbestos
  • Roofing issues
  • HVAC problems
  • Obsolete appliances
  • Parking lot maintenance
  • Environmental contamination
  • ADA compliance issues
  • and more

Some of this is a function of the actual age of the property, while some of it is a function of the upkeep and maintenance that has been performed in the past.