The first half of 2022 lived up to the promises made by many experts, despite the rise in interest rates that caused concerns and dampened the market. Anybody interested in how to invest in multi-unit properties is still seeing opportunities as the multifamily investing news continues to be positive.
Best Year Ever?
Those who track trends in multifamily CRE predicted that 2022 could be the best year ever. In addition to rent growth, occupancy rates also went through the roof. An industry expert has gone so far as to call this the “golden age” of multifamily investment.
President and Chairman, KBS, Charles J. Schreiber Jr.,said, “Reports are showing all of the major world economies will be in or near a recession during the next quarter, but the U.S. market should perform better than the others. The entrepreneur talent within U.S. companies continues to advance successful firms through challenging economic times.”
Business-Friendly Locations / Live-Work Play / Return to Office
Locations with a pro-business attitude continue to offer natural soft spots for increased development and mixed-use opportunities that emphasize a live-work-play lifestyle. In some locations, signs of a revival in downtown office space are still emerging.
“I see a major trend in office once again as it relates to what we would call the CBD office,” said CBRE’s Spencer Levy. “Our client at Heywood Properties calls it ‘BBD office’ or a Better Business District office. Multifamily is now in these BBD places that are live-work-play.”
The speed of the comeback has been somewhat unexpected. “A lot of prognosticators were saying it’s going to take ten years for the urban core to rebound,” said Carl Whitaker for RealPage.
“Most major urban core apartment nodes have already gotten back to their pre-pandemic occupancy rates and rental rates. Some of that is being driven by the return to office, but I think there is a segment of renter by nature that’s going to want to live downtown. That demand never fully went away.”
Job Growth is the Key Multiplier in Multifamily CRE
Employment is still the main engine driving the rebound. “The statistic that I always use is job growth,” says Levy. “It’s the most important statistic in real estate because it has a multiplier effect. For every six office jobs, you have demand for one more multifamily unit. Then you have demand for two more retail jobs and eight more hotel nights.”
Vacancies Remain Low – More Good News
The general expectations for the rest of the year include more rent growth and low vacancy rates. The trend of sky-high occupancy rates kicked off at the end of 2021. “Remarkably, we saw it increase from December to January,” says Whitaker. “The first time we’ve ever seen occupancy increase between those months.”
Experts who were bullish early remain optimistic about the rest of the year. Blue Lake Capital CEO Ellie Perlman said, “I believe that prices will remain high throughout 2022. However, I think that cap rates might remain the same. I also expect vacancies to remain low and rents to keep growing. The reason why I think that this will happen is that I believe migration from core markets to secondary and tertiary markets, and migration from the cities to the suburbs, will continue.”
Multifamily CRE a Solid Investment
According to We Lend, “average rents rose by 3.5% from Q1 to Q2 in 2021. Meanwhile, the average vacancy rate fell by 70 basis points to 4%. In total, investment volume increased by 34%, to $52.7 billion.” As the effects of the pandemic start to wane, a sense of normality is foreseeable.
“Rents are rising, occupancy is strong, and new construction is still prevalent in most markets,” said the Kiser Group’s Lee Kiser, who believes there’s a strong multifamily market ahead. “Both interest rates and cap rates will likely increase, but property values per unit should continue to grow as rent and economic growth increase net operating incomes as an offset.”
The demand for vertical construction in the multifamily space will remain rooted in the cities. “Building vertical multifamily in suburban areas isn’t easy,” says Levy. “Many of these suburban areas have zoning rules that don’t allow you to go vertical. But at the same time, many of them have open air retail that’s underperforming.”
What’s Next for the CRE Multifamily Sector?
Even though retail took a major hit from the pandemic, it still flexes a large mixed-use muscle. “We know that retail, especially walkable retail, is absolutely an amenity from the perspective of the renter,” says Matt Vance, at CBRE.
KBS’ Park Central Apartments is just one multifamily property that exemplifies the benefits of having retail as an amenity. Considered one of the highest-end multifamily communities in Raleigh, North Carolina, Park Central offers an urban quality of life with walkable access to over 80 retailers and more than 40 restaurants — from casual to high-end — including a Capital Grille steakhouse and Yard House.
“If they can walk out their front door and access the bars, restaurants, and shopping, they’ll pay for that,” said Vance. “They are happy to pay for that. When we think about suburban, we’re not really talking about greenfield developments much. When we do, we’re really talking about developments that have some mixed-use component to them.”
While the balance of 2022 will decide how multifamily performs for the year, the coming months will likely be a continuation of sector’s upward trend. As the country continues to emerge from the pandemic and deal with a downturn in the economy, the upswing in multifamily has left investors with a window of opportunity.
To learn more about multifamily and other commercial real estate, visit KBS.com/Insights.