What is the right approach right now for passive income investors?
Multifamily has always offered an attractive risk-adjusted real estate investment. As an asset class it is especially compelling right now, given favorable economic and demographic trends against a backdrop of late-stage cycles in real estate and financial markets.
IMG believes multifamily assets, including our current Tenant-in-Common offering (324 units, Charlotte), will continue delivering stable cash flow yields and value growth in today’s investment environment for the following reasons.
Rental demographics are favorable
Rental demand is being driven by Millennials (aged 24- 39), the significant Gen Z generation now entering the rental market, and Baby Boomers who are downsizing and making lifestyle changes. Each of these population segments increasingly seeks the affordability and mobility provided by multifamily, in markets offering quality-of-life features.
Home ownership barriers are high
A combination of rising home costs and weakening purchasing power pushes first-time home buying out of reach for a growing population. Entry-level home prices are up 9.7% nationally since 2015, mortgage rates are moving higher, and student loan balances for those under 30 has ballooned by more than one-third over the past 10 years. Multifamily offers good value to younger households, reflected in 2017 homeownership rates at 32% among 25-29 year-olds and 46% for 30-34 year-olds, well below the national average of 64%.
Unique multifamily investment characteristics
Short leasing cycles of one year, lower capital expenditure requirements and better balanced construction cycles allow for rapid responses to market shifts and predictable cash flow. In addition to cash yields that are generally higher and more stable than all other investment property types, multifamily investments are the most liquid and supported by a broad debt market.
Defensive positioning in economic downturns
The U.S. economy is widely considered to be in a late stage of its economic cycle, with several recent short-term Federal interest rate increases and forecasts for slowing economic growth in the years ahead. Past recessions have shown apartments perform better than other property types during recessions, then rebound faster as the economy emerges from recession. The Real Capital Analytics’ Commercial Property Price Index (CPPI), a widely-used benchmark of property values, reports that during the global financial crisis, apartment values took 47 months to recover value losses, compared to core commercial property which took 78 months for full recovery.
Multifamily outperforms in changing interest rate environments
Financing rates for apartments have been lower than other commercial property types by an average 48 basis points over the last 10 years. Low interest rates reduce debt service expenses for a positive boost to bottom lines. And when interest rates rise in response to inflation, short lease cycles allow for real time rent price growth while higher rates restrict new apartment supply with more expensive construction costs and make for sale housing less affordable.
IMG’s focus on Tenant-in-Common real estate ownership and successful experience in all phases of the real estate cycle underscore its confidence in apartment investments.
Should economic growth slow or interest rates increase, IMG anticipates outperformance in the multifamily segment and will continue delivering returns to its investor partners through prudent acquisitions, attentive asset management and strategic dispositions. For more information, contact David Mikkelsen at (971) 888-4010 ext. 108.