Second-quarter 2021 has shown a massive increase in multifamily investment volume to the tune of 34% quarter over quarter -- up to $52.7 billion, according to a recent report from CBRE. Not only was the dollar amount for investing in multifamily real estate way up, but a near-record quarterly absorption of 179,400 units was also realized during this same period.
In short, vacancy rates are down, rents are up, and it seems like a really great time to be buying multifamily properties.
Of course, it’s great to be told that things are up and things are down in all the right directions, but truly understanding why the market is doing what it’s doing is kind of important. Although there are always plenty of market forces at work, when it comes to multifamily investing, the most important consideration, by far, is whether you can rent out those units at a reasonable profit.
A quick look at what’s driving the multifamily investment market
It’s a fairly intense time to be in the real estate market, whether as a residential buyer or a multifamily investor. Things that happen in the residential market tend to ripple outward, affecting everything else -- and the things happening there right now are pushing more potential buyers into rental units.
For example, housing affordability is not great. Even with low mortgage rates, the lack of housing inventory is still putting a squeeze on a lot of markets, according to National Association of Realtors (NAR) research.
NAR found that throughout 2020 and into the first half of 2021, there were 2.1 million new household formations, but new home starts sat at 7.9 per 1,000 new households. Only 32% of those homes were sold for under $300,000 in the first half of 2021.
This, coupled with the average median sales price of existing single-family homes in Q2 2021 sitting at $357,900 nationally (an increase of $66,800 over Q2 2020 and $89,900 over Q2 2018), suggests that this problem is only continuing to build. Even though builders are ramping up production, there simply aren’t enough units to go around, especially when it comes to more affordable options.
Multifamily investment demand remains high
Because purchasing a home is increasingly difficult for a larger number of potential homebuyers, many are continuing to rent whatever they can get their hands on. The overall vacancy rate was at 4.0% at the end of Q2 -- the lowest national vacancy rate in two years.
The vacancy rate was below 3.0% in 14 markets:
- The Inland Empire
- Ventura, California
- Providence, Rhode Island
- Norfolk, Virginia
- Sacramento, California
- Madison, Wisconsin
- Orange County, Florida
- Long Island, New York
- San Diego
- Hartford, Connecticut
- Salt Lake City
- Colorado Springs, Colorado
Along with there already being so much demand for units, these units are bringing in more overall, which is great for investors. In Q2 2021, average rent rose 3.5% quarter over quarter, as well as 0.5% year over year (YOY), to $1,737. New York, San Francisco, and San Jose, California, are realizing smaller gains, but the sheer size of these cities has skewed the national average. If you exclude them from these figures, the YOY average national rent is up 4.2%.
Even though cap rates on multifamily real estate in Q2 2021 came in at a modest 5.04%, down from 5.29% in Q1 2021, there is still a lot of demand for multifamily housing from potential renters. Investment demand has increased 222% YOY, indicating that purchase competition for these units is still fierce.
The Millionacres bottom line
In many markets, there is still a lot of room for more players in the multifamily space, though the future may be in coming up with affordable housing. Before you take a leap into multifamily investing, carefully consider your expenses, your competition, and what your market will bear as far as rents go.
Much of the reason we’re seeing so many people needing rental units is that buying a house is just not possible for them in the current climate, but that may not always be the case. Those higher-income renters have the potential to get into the housing market faster, leaving you high and dry.
Although Class A multifamily investments are always attractive to purchase from the outset -- given that they need almost nothing, and you can charge premium rent -- they may be a harder sell as cap rates in the multifamily market tighten further.
Class B or Class C could be more profitable longer-term options, again depending on the particular market you’re in and what the rental market looks like overall. There’s a huge opportunity right now for multifamily landlords to get into affordable housing and hold on to tenants for much longer.
It will take some time for wages to catch up to the average home price for many families, leaving some large gaps to fill in the housing market. And even with cap rates driving lower, good Class B and C tenants can be worthy investments long term.