Multi-family apartments have been one of the primary beneficiaries of the economic expansion over the last decade or so, continuing to attract considerable attention from savvy investors.
Yet, whilst institutional demand for the asset class has been ever present during such time, many of the more news-worthy transactions have been by smaller or medium sized private equity related ventures.
However, the investment landscape is changing with many more institutional type investors entering the market sector over the course of the last few years—and more likely to do so in the coming years.
So what are some of the things which have caused this shift in investment attitudes from institutions about multi-family?
Sustainable demand for rental units
- An attractive demand/supply imbalance exists, which is unlikely to dissipate given the strong ongoing demand. Such demand being partly as a result of several sustainable key demographic and social trends creating a larger more stable rental pool. Such trends include:
- an increasing number of retirees is likely to result in a so-called “Silver Tsunami” where nearly 35% of US households will be headed by a person over the age of 65 by 2035.The largest increase in numbers renting in the decade (2007–2017) following the financial crisis was people over 55 when this figure grew by 38%, with the number of renters over 65 being even greater at 65%.There will be more demand from renters in this sub-set due to a combination of significant increases in the number of “baby boomers” hitting retirement age and longer life expectancy. Indeed, in the coming years retirees are expected to account for some 79 million people nationwide, many of who have a cashed in their real estate ownership and are looking to rent;
- compared to previous generations, millennials (those born between 1981 and 1996).are less likely to buy their own home due to a combination of factors. These include having specific purchase requirements which are hard to fulfil, but also reduced affordability as a result of their high levels of debt—and, so, renting may be the only option for some;
- overall, affordability is probably the biggest challenge for many would-be home owners in the US, and many people no longer can afford to own their homes. From 2008 to 2018, median home sales prices across the US rose almost 32%, yet average income rose less than 6%, according to data from the National Census.Price rises have been even greater in certain fast-growing areas and, so, what’s the alternative if you can’t buy?
Renting in a multifamily property block…
Following the pandemic, multi-family apartment investors are enjoying substantial rental growth, seeing record low vacancy rates and, as mentioned, an attractive supply/demand imbalance.
Institutional capital investing in the core and core-plus market is naturally attracted to the strength of the market, its growth prospects and stability of the asset class over the long term.
Cross border investment opportunities
Institutional capital has been discovering the attractions and benefits of cross-border deals, and not only relating to transactions involving US money to Canada and vice versa. There have been major investments in the multi-family sector in European countries with larger, increasingly more sophisticated populations. Countries such as Poland and Hungary as examples.
Of course, the more mature European markets such as Germany, the Netherlands, Denmark and the UK offer cross border investment opportunities too.
More cities with new generation businesses and diversified demand
Certain US and Canadian cities or States have booming economies, maybe technology or new-economy related and are attracting more and more younger, highly qualified individuals and new businesses. Most of these newcomers prefer to rent, possibly can’t afford to buy or, indeed, may not wish to buy as they might well relocate in a year or so.
Number of unexplored markets
In countries and economies as large as the US and Canada, there are still “unexplored markets”. Such new markets offer the opportunity to build stock from the ground-up, this being a key advantage in view of increased efforts to deliver modern, high-quality and sustainable housing which meets modern requirements but also ESG commitments. What’s more, unexplored markets offer ”first mover advantage” and the opportunities to gain access to deals with higher yields. In some markets, there is the chance to quickly build economies of scale where competition from other investors is not yet apparent.
Multi-family has a durable income stream
Investment in multi-family assets provides a return akin to bonds, as well as a hedge against inflation because leases renewed and rents revised on a regular basis. Furthermore, multi-family can be termed an essential asset class, as people will always need somewhere to live.
Growth in scale of markers and assets
Institutions like scale—or bigger deals. There’s no point investing US$ 30 million in one deal when the entity has $300 million to invest. As projects get larger or multi-family portfolios are available to acquire, institutional money can partake with national or international partners in some very large single or multi-market (national or international) deals.
And, best of all: attractive investment returns
Of course, all markets and projects and, accordingly, returns, are different, but entities managing multi-family assets in certain US States report achieving yields of 10%+ in 2020. For an institution able to acquire off-market properties at substantial discounts then “value add”, investors have opportunities to invest in specific properties with target IRRs of +16%.
We at CPI Capital have been identifying opportunities and investing in multi-family assets in the US for a number of years. We remain confident that the sector will continue to produce attractive passive returns for our investors.
The fact that more and more institutional money is looking at and investing in the sector can only be seen as a major positive, especially as the demand drivers from end-users appears to be eminently sustainable.
– Ava Benesocky
CEO, Co-Founder Canadian Passive Investing
– August Biniaz
Chief Strategy Officer, Co-Founder Canadian Passive Investing