Multifamily real estate has emerged as the hottest asset class in the commercial real estate sector. The value of multifamily properties has increased so rapidly over the last 18 months that it’s surprising even long-term multifamily investors. In 2020, there was a brief drop in multifamily investment, but those losses were quickly regained and the value of multifamily has continued to rise ever since.
Multifamily investments have been seeing quarter-over-quarter growth – let alone year-over year – that had previously taken years to achieve. In 2021, the RCA Commercial Property Price Index (CPPI) for the apartment sector climbed 23.6 percent year-over-year. Today, multifamily is the largest segment of the U.S. commercial property investment market.
While interest in other types of commercial real estate, such as office and retail space, was sharply curtailed by the pandemic, the increase in the volume of multifamily transactions has been striking. According to a report by Real Capital Analytics, “In the third quarter of 2021, the apartment and industrial sectors constituted some 60 percent of total activity. It was a record quarter for apartment deal volume, with the quarterly total higher than the average annual totals for the sector from 2008 to 2011.”
Lenders have found multifamily properties especially enticing. At the end of last year, commercial and multifamily mortgage bankers were on track to finance $578 billion of loans in 2021, which is up 31 percent from 2020’s volume of $442 billion. The Mortgage Bankers Association expects 2022 to be an even busier year for multifamily transactions, with loan financing activity estimated to increase to $597 billion.
The appeal of multifamily investing has been driven by a housing shortage that has created hyper competitive markets across the country. Seasoned real estate agents were stunned to see bidding wars and competing all-cash offers in markets where that had been unheard of. This shift was largely due to new residents that had relocated from pricier markets such as California, Seattle, and the northeast. That caused a lot of would-be home buyers were priced out of homeownership and had to continue renting.
That surge in demand has made multifamily real estate irresistible to investors. While retail and office space languished, multifamily properties generally maintained high occupancy rates and rental collection rates.
Prior to the pandemic, multifamily properties weren’t especially sought after in smaller cities, but with so many people relocating to less densely populated areas, multifamily properties in suburban markets saw demand skyrocket. A perfect example of this is Boise, Idaho, which attracted a lot of new residents during the pandemic. In 2021, Idaho saw the highest percentage increase in population out of all fifty states, with the majority of new residents moving to Boise. As a result, the cost of renting in Boise has increased by 32% since March of 2020. For investors, it’s hard to beat that kind of revenue growth.
Millennials and Gen Z have helped lead this migration away from more densely populated urban centers. As a group, they’ve been looking beyond densely populated urban areas to smaller cities that offered more space for less money.
With the demand for housing exceeding inventory by 5.24 million homes (according to CNBC), there’s no question that rental housing will be needed to fill in that gap for the foreseeable future. For investors, that means that multifamily will continue to be a hot investment.