Excellent Prospects for Apartment Investors According to Freddie Mac

Freddie Mac has become one of the primary lenders for commercial multifamily real estate. Over the course of only a handful of years, the organization has lent more than $80 billion to the multifamily sector. Such significant spending is fueled by demographic and economic trends that point to a multifamily market that will continue to grow. 

Part of the reason prospects are excellent in the multifamily sector is employment trends. As more young people get steady jobs, they will move their families into apartments. Another reason to invest in multifamily units is that demand already exists and will only likely continue to grow because there is a shortage of affordable multifamily homes across the United States. 

Millennials are playing a large role in the growth of the multifamily market. Because of unemployment and student debt, many millennials feel excluded from the housing market. As these individuals slowly get jobs, they are more focused on renting than purchasing. 

According to Freddie Mac, a need for 440,000 new units per year will exist for the next decade. Also, new single-family construction is below demand, so families are staying in the rental market until more homes are built.

The Benefits of Hard Assets Like Multifamily Properties

In 2012, the Standard & Poor’s 500 index was trading at the same levels as it had in 1999. That year, the industry celebrated a four-year high, which really just meant that people who invested money before the downturn of 2008 had finally restored the original value of those investments. However, the value of this amount actually decreased due to inflation, meaning that investors still lost money during those years. 

Between 1999 and 2012, a period of 13 years, zero return was achieved; in fact, negative returns occurred when one factors in inflation. Many people believe that mutual funds provide a safer investment than other vehicles, but more than 80 percent of mutual funds performed even worse than the market during this period.

Part of the insecurity involved in such investments relates to the fact that they can dissolve virtually overnight because of ethics violations, or even rumors on the trading floor. However, hard assets, such as multifamily apartment buildings, do not come with the same insecurity. These assets will not disappear overnight, and in the event of disasters like fire or flood, they are protected by insurance. Furthermore, hard assets like commercial real estate provide excellent tax benefits that are not linked to less tangible investment options.

Multifamily Investors Are Moving into Secondary Markets

A dramatic shift has occurred in the multifamily market: Investors have finally begun buying apartment properties and multifamily complexes on a large scale in smaller cities and towns. While offers for properties in the secondary and tertiary markets have been increasing steadily for some time, it’s only recently that there has been a significant jump.

According to the data firm Real Capital Analytics (RCA), in the first quarter of 2015, investors purchased $16.2 billion in apartment markets located in secondary and tertiary markets nationwide. During the same period, $12.3 billion was purchased in the six major metropolitan areas (Boston, Chicago, Los Angeles, New York, San Francisco, and Washington, DC). RCA further stated that, among the five major property types that the company analyzes, it was only in the apartment sector that markets outperformed the six major metropolitan regions.

It’s not difficult to see why this movement toward secondary markets is happening. In core markets, prices have become so high and returns so low that investors are increasingly pursuing yield into secondary markets. Commercial real estate investment firm Marcus & Millichap measures a difference of 240 basis points between the average cap rates to be found in primary and secondary markets. The firm further finds that, on average, the apartment markets that provide the highest yields for apartments are secondary markets.