In our previous entry, we presented some trends and forces affecting commercial real estate, specifically those related to office properties, retail properties, and industrial properties. This article discusses the trends and market forces affecting Multifamily properties.
A force with which you should reckon: rising interest rates
As mentioned in our previous blog entry, almost everyone agrees that the recent and future Federal Reserve interest rates increases will put "upward" pressure on lending rates, including rates for private commercial mortgage loans. While we are still far from their all-time high, interest rates have steadily increased. Suppose you are evaluating investing in a Multifamily property. In that case, you should definitely factor in higher interest rates for the next three to five years.
Trends in Multifamily Properties
Demand for multifamily housing remains strong because the U.S. has a chronic housing shortage in terms of housing units. "We're seeing a shortage, or housing underproduction, in all corners of the U.S.," says Mike Kingsella, the CEO of Up for Growth, as quoted by National Public Radio. The shortage has increased from around 2.5 million units in 2018 to about 3.8 million units at the start of 2022. "America's fallen 3.8 million homes short of meeting housing needs," Kingsella says. "And that's both rental housing and ownership."
Given the rising prices and increasing mortgage rates in the single-family housing market, people are renting for longer. Adam Neumann, the famous entrepreneur behind We Work, has termed younger Americans as "Generation R" members because of their need to rent a place to live. At the moment, owning a house is an option for only a tiny percentage of potential buyers within the current economic context.
During these uncertain times, workforce housing appears to be a solid investment opportunity for those interested in investing in commercial real estate.
- Investors can be faced with costs to modernize dated apartment units. However, the demand for these units may outweigh those modernization and updating costs.
- Considering not only the shortage mentioned above but the increase in single-family home prices and multifamily rents, in almost all large metropolitan U.S. areas, there exists a situation where large parts of the workforce need more housing and, in particular, more affordable housing without sacrificing quality and convenience.
The need for affordable housing outpacing the housing supply brings along interesting trends.
- Adaptive reuse in which Class C malls (and maybe even some Class B malls) will be retrofitted to transform into housing units, as opposed to being kept available as retail spaces. "As the country navigates hybrid work, we'll gain a clearer picture of how to best use office [and retail] space," says Al Brooks from J.P. Morgan.
- Modular construction to speed up construction and lower building costs.
- Preservation of what appear to be "old buildings" but, with careful planning, can be modernized to meet modern living demands and needs. This preservation applies nicely to Fix and Flipping multifamily properties.
- New paradigms of living, such as that being proposed by Neumann in his latest startup "Flow," where specific spaces are shared by tenants (for example, kitchens and dining rooms) and private spaces occupy a smaller surface area, thus making suitable housing more affordable.
According to Al Brooks at J.P. Morgan, the most significant trend to impact Multifamily properties "may come from public-private collaboration, such as big tech and healthcare employers working with local governments to develop workforce housing near workplaces."
Multifamily properties have thrived in 2022. Consumer demand could bolster the multifamily asset class. Nevertheless, Real Estate investors should keep an eye on interest rate hikes, supply chain issues, and geopolitical events; they should also explore relationships between public and private entities regarding affordable housing.
As private mortgage lenders at AMI Lenders, we focus on helping our clients capture opportunities in the real estate market. We are one of Houston's most reliable private commercial mortgage lenders and could become your financial ally. We fund our loans and can move as fast as the law allows. Borrowers in Houston will also have a hard time finding lower rates for hard money or private loans than we offer. We want our customers to succeed and take advantage of the financial opportunities provided in real estate investments. Visit our website today and fill out an application for a loan backed by a commercial property.