The current housing market has seen some major strain over the past few years due to the pandemic. There’s a shortage of inventory, homes are more expensive than ever, mortgage rates are going up, and the downstream impact is that it’s more difficult to find single or multifamily homes at any price.
Multifamily properties and apartment buildings have become hot commodities for investors recently. They tend to be lower risk with a higher reward and the opportunity to profit off multiple units with just one property purchase. Here are our top five ways the current housing market is affecting multifamily real estate and apartments.
1. Property Sales Reached Unprecedented Heights
Housing prices have risen more than 15% in 2021. This has increased demand for rental housing. In fact, multifamily unit sales totaled more than $260 billion in 2021. Plus, over the past few years, the average multifamily capitalization rates have compressed, from 5.3% in 2020 to 4.7% in 2021, a new low. These are expected to remain low throughout 2022.
2. Rental Growth Means Increased ROI
Rent growth continues to increase, even higher than pre-pandemic levels and, in some cases, more than 15% year-over-year. Those who can capitalize on these rent growth trends, therefore increasing rental prices, are experiencing a higher return on investment.
Continued high demand, as well as the improving economy, has allowed charged rent to increase to dramatically, and while it may be more reasonable in 2022, it will still be elevated over past years. This increased cost isn’t as great for renters, but it’s an ideal opportunity for property owners to make more money from their units, either to invest back into the property, buy other property, or keep as profit.
3. High Demand for Multifamily Units
Due to the lack of inventory and high prices for purchasing a home, demand for multifamily and apartment housing is extremely high.
At the end of 2021, housing data from the Census Bureau shows national vacancy rates were between 5% and 6%, which is extremely low. Many renters who would normally transition into purchasing their own home are staying in their units, decreasing availability of units for new renters who are looking for units due to high housing costs. Demand drivers include seniors, low- and moderate-income renters, first-time renters, and lifestyle renters (affluent individuals choosing apartments over single-family home ownership).
Replacement demand and new demand for multifamily units will continue competing for a limited number of available units. In many areas, demand is outpacing supply.
One additional upside to this is that lack of rental turnover and low vacancy means property owners aren’t dealing with costs associated with filling units, therefore saving money.
4. Investment Opportunities are Strong
Those looking to invest in rental properties are still finding success. This is due to the housing shortage, demographic shifts, low rates of homeownership, and other factors. New constructions popping up in suburban and urban areas at a record pace. However, the ongoing demand for rental units will keep up with the new supply. There is enough demand to go around and ensure occupancy at both new and existing multifamily properties.
It’s also estimated by analysts that new supply will be more expensive, and tenants may opt for these newer units that have more amenities. Even with job growth this year, demand will continue outpacing supply in many big cities. With the need for more supply, investors can continue purchasing, renovating, or building these types of housing without having to worry about lack of demand.
5. Concessions are Heading Back Down
The number of multifamily units offering concessions decreased dramatically in 2021. However, concession rates remained elevated. As of the end of 2021 (the current housing market), only about 10% of multifamily rental units were offering concessions. This is compared to nearly 23% in 2020. While these levels are trending downward, they remain elevated above historical trends.
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