US multifamily trending

Drawn by strong demand fundamentals, market depth, transparency and liquidity, investors are flocking to US multifamily residential. But as competition for assets grows, the challenge to source attractive opportunities and scale a meaningful portfolio is mounting. By Paul Allen

With inflation hitting 40-year highs and interest rates climbing, the investment case for US multifamily residential is getting ever stronger.

“Investors entering the market will benefit from asset price adjustments resulting from the abrupt interest rate increase,” notes Malcolm McComb, Vice Chairman in CBRE’s Capital Markets Group. “Investors also view multifamily as a good inflation hedge since the leases turn over every 12 months.”

US multifamily housing – with its opportunities to invest in multiple rental units in a building or larger complex – is a well-established part of institutional portfolios. But strengthening fundamentals are adding to the sector’s attractions.

“Younger millennials are not transitioning from renters to homeowners at the pace previous generations did,” McComb observes. Many prefer the renting lifestyle. Add in student debt of $1.7 trillion – which makes it hard for many to save enough for a down payment – plus increased home ownership expenses from the Q2 spike in mortgage costs, and residents are electing to remain renters, he says.

The timing is good for lower leverage investors to buy quality multifamily assets.
Malcolm McComb Vice Chairman, CBRE Capital Markets Group

Demand has been buttressed by the leading edge of Generation Z, who are entering peak renter years and competing for the already short supply of rental housing stock. “With fundamentals so strong and assets repriced, the timing is good for lower leverage investors to buy quality multifamily assets,” says McComb.

Attractive fundamentals for equity-rich investors

Union Investment invested $226 million in two multifamily assets in the US in 2021, and plans to add more. “We view the sector as an ideal and timely diversifier to our sizable US portfolio, which historically has been heavily weighted towards offices,” says Matthew Scholl, Union Investment’s Head of Investment Management Americas.

The growth markets of the American Sunbelt are particularly attractive, Scholl notes. “With increased flexibility around hybrid and remote working, coupled with affordability and a rising number of quality-of-life seekers, many of these markets have been beneficiaries of relocated corporations and workers moving away from higher-priced coastal cities,” he explains.

While prime gateway cities continue to offer opportunities, markets such as Charlotte, Nashville, Austin, Dallas and Denver are now also considered core multifamily locations, which wasn’t the case even 5 to 10 years ago, says Kevin Harrell, Managing Director at multifamily development specialist LMC Investments.

LMC focuses on high-rise, mid-rise and garden developments. The pandemic heightened demand for gardens as occupiers sought more space. But with life returning to normal and cities reopening, demand and asking rents for high-rise – especially highly-amenitised assets that can charge a premium – are rebounding, Harrell notes.

Properties with the best amenities are winning the race, Scholl agrees. “Depending on market/region, these include rooftop swimming pools, state-of-the-art gyms, high-end game rooms, pet spas, golf simulators, concierge services, Amazon storage lockers and wine storage. We’ve seen a noticeable gap in landlords’ ability to push rents where amenities are not cutting edge and relevant for today’s discerning renters.”

With land costs rising, market economics have driven developers to focus on mid- to high-luxury product over the last 10 years, says Harrell. LMC, though, is also moving into attainable housing through its Emblem sub-brand. By designing a garden product once and replicating it around the country, construction becomes more efficient, Harrell explains. Amenities are scaled down, too. “Because costs are reduced and you’re building it faster, returns are better and rents can be lower,” he says.

Build-to-core route to scale

With US multifamily an increasingly attractive defensive safe haven for investors, the challenge now is to scale meaningful core portfolios, Harrell comments. “That’s where build-to-core comes in.” LMC’s development spread has historically been 25 percent to 30 percent, he adds. “Our investors see this as a great risk mitigator.”

A build-to-core strategy is particularly interesting for Union Investment. “Despite interest rate moves from the Fed, we’ve still not seen meaningful cap rate expansion on stabilised assets in several of our target markets,” Scholl notes. “We see an attractive yield spread between acquiring existing assets and build-to-core opportunities, and feel the demand fundamentals will remain strong over the medium to long term.”

By Paul Allen

Title image: Union Investment

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