One of the most highly invested categories of real estate is the multifamily sector. These could start as low as 2 units and go up to properties with hundreds or thousands of units. Popularity is also being driven by the new wave of investors getting into real estate, with a tech enabled approach and the onset of the new Real Estate sector on the stock market.
Looking across the nation, we see that there is an average vacancy of around 3.5%, and rents are looking up 33% since 2006. These are great numbers, considering that most people have been taking shots at the economy and job growth/creation. Even the cycle pattern that we are on now shows more modest growth over a sustained period compared to the growth cycles we have seen in the past. As a matter of fact, this growth cycle is the 4th longest we have seen in the recent past.
With small wage growth continuing on an upward pattern, it allows more people to have expendable income which could be used to move up in value or create more excess spending which will spur along the multifamily and commercial markets. This, coupled with the increase in regional and national bank lending in the multifamily space leads us to see a prosperous future for this sector, especially new construction multifamily units.
This new multifamily construction boom is based on the needs of the 20-34 year old population. As Millenials are starting to move out of their homes, they are looking to rent until they can start to save enough for their future home. The last time we saw a boom like this in multifamily was when the baby boomer generation started moving out of their family homes. We are also seeing this boom hit the primary markets around the States. This is interesting because previously, these primary markets would be the hardest markets to get into.
Because of these new construction numbers, we start to look at vacancy rates. With more new product coming onto the market it is fair to see a small drop in vacancy rates because of the higher rate of competition, and this is no different. Class A properties are already starting to see an uptick in vacancy rates, while Class B & C properties are trending down in terms of vacancy. What this shows, is people in ‘lower end’ properties are starting to take over the lion’s share of the market. Even looking at secondary markets, we see that the secondary and tertiary markets are starting to enjoy stronger financials than some primary markets.
Secondary markets are seeing the lowest vacancy rates of all three markets, and they also have the highest rent growth year over year, at 4%. Tertiary markets are slightly behind the Secondary markets, and both are well ahead of the Primary Markets. Sacramento saw the highest increase in rents year over year, with over 11% growth, and it is a Secondary market as well.
Because of the lack of return in the Primary market we have started to see some buyers come into the Secondary and Tertiary markets which has made the need for a solid offer much more important. Many people are starting to see competitive offers at a 30 day look, 30 day close, no financing contingency, and high earnest money deposits. This can be difficult for the smaller investors to get into competition with, and could cause individual investors to look more into the Tertiary market which will also be more affordable, in most cases.
Written By –
Sanjeev (Sunny) Advani