Current Economic Data Supports Multifamily Investments, Says David Blatt, CEO of CapStack Partners

While multifamily properties continue to be a strong performing asset class, generally outperforming most other property sectors, lenders have recently begun to express caution about financing new multifamily projects because of concerns that there is too much inventory. Many banks share the belief that the added supply will cause vacancies to increase and rents to drop, especially those lending into primary and high growth markets, which have been seeing the most investment activity over this last market cycle.

While it is certainly valid to monitor the volume and delivery pace of apartment inventory, banks’ views can often get distorted when their primary data source is their loan portfolio allocation. While lenders will naturally become more selective as they consider increasing their multifamily exposure, it’s critical that they rely on a broader dataset to ensure attractive multifamily lending opportunities are not overlooked. The most prudent lenders also rely on historical and economic data to help guide their capital allocation decisions.

The macro data suggests that multifamily is still supported by strong economic fundamentals. For instance, while the national vacancy rate for multifamily property is projected to increase to 5.6% in 2017 and to 5.7% in 2018, according to CoStar Group, these figures are still below the 15-year average vacancy rate of 6.1%. Meanwhile housing starts are at a historic low less homes are available for sale than in any previous cycle and the cost to build is climbing, especially with the recently implemented tariffs against Canadian softwood lumber imports. Additionally, the recent and continued rise in interest rates make it more challenging for people to purchase homes. All these factors will redirect prospective buyers back into the rental population, helping multifamily maintain its status as a safe and stable asset class.

In high growth markets, we check the apartment inventory data against fundamental economic drivers like growing industries and labor force. We look to structure our clients’ debt and equity financing to be stable enough to handle momentary ebbs and flows in the cycle. This allows developers and operators to zoom out and focus on executing a fundamentally sound investment strategy based on drivers like jobs and population growth.

Multifamily is the largest asset class within real estate investing. When high profile institutions actively build then sell in the short-term, and lenders begin to murmur about too many apartments, it is important for private investors to remember that buying and building rental properties isn’t a market timing game. Rather, it is about managing and locking down your property operating and financing costs, increasing your rental revenue, and enjoying the appreciation of your investment over time.