Allison+Partners Partner and Managing Director of the Real Estate Practice Richard Kendall and I were fortunate enough to moderate panels at the Bisnow Multifamily Annual Conference in Seattle last week. Like most conversations these days, much of the discussion centered around economic headwinds and a looming recession. And though the multifamily space, specifically affordable housing, has its share of challenges, there should still be massive optimism for investors. Namely, the often less-discussed tailwinds.
By one senior economist's account, the U.S. is underbuilt by more than 900,000 units. But that’s just the beginning of the story. Add in a dash of escalating pricing in the single-family market plus a sprinkle of less-than-desirable interest rates, and owners/investors have a fantastic recipe.
Oh, and don’t forget national rental rates, which have seen double-digit growth year over year in recent quarters. And while we should expect some stabilization in the months to come, no one in their right mind thinks rates will get anywhere near pre-pandemic levels. For good measure, rates were strong, demand was high and apartment owners also did incredibly well then.
Moody's Analytics Head of Commercial Real Estate Economics Victor Calanog told A+P multifamily will do well versus other property types.
“We’re recording effective rent growth that will likely hit 7% for 2022,” he said. “Sure, that’s down from more than 12% from 2021, but that ain’t bad.”
Of course, investing is not always that simple in practice. It probably should be, but humans tend to get caught up in the details.
Still, savvy investors know some of the best money is made in recessions. In layperson’s terms, things go on sale during economic slowdowns. Read the first line of this post again. So, like a new parent in mid-November as the Black Friday phenomenon takes hold (yes, I speak from experience), the standard operating procedure is buy, buy, buy.
That said, panelists at the Bisnow event agreed this recession will be unlike recent ones. One big difference is data and trends do not show any significant amount of distressed assets coming to market.
In its recently released global investor outlook report, Colliers explained this further.
“Unlike the aftermath of the Global Financial Crisis, liquidity remains broadly available, leverage is lower and demand in most asset classes remains healthy,” the report stated.
At the Bisnow multifamily conference, one panelist put it another way: Those who have invested in real estate this cycle are “in the money.” He added that current caution in the marketplace can be seen as an advantage; it's an opportunity to be more aggressive.
Another panelist put it even more succinctly, sharing that his firm was actively looking to buy and company leadership had conviction that acquisitions made in the next 12 months would be lucrative.
Yes, costs are on the rise, and that could make underwriting challenging in certain markets. Whether it’s something like a cement strike in Seattle that delayed development across the region earlier this year or rising costs of things like insurance in states more greatly impacted by natural phenomenon like hurricanes, there is always something. Investors of all kinds, but certainly those in the real estate sector, are used to this.
This period is just like any other: There are more and less attractive opportunities for real estate investors.
It may not make the most sense to invest in commercial office space unless you’re prepared to offer a truly differentiated experience. As hybrid work continues to become an even larger part of our business culture, landlords need to market something special.
Industrial makes a whole lot of sense, especially so-called “last-mile” distribution centers, which have revolutionized the industrial sector into an e-commerce industry.
According to the Colliers report, the No. 1 asset class investors are interested in for 2023 in the U.S. is multifamily.
Full circle back to the Pacific Northwest, where panelists at the event call home, it’s really all about those tailwinds. Seattle is far from alone, but it has several things going for it that keep investors bullish.
The area is near the top of the list for employment and population growth, a strong tech presence and, while it’s not the best news for people looking to buy a home, the single-family market operates at pricing levels that push a large swath of the market out of contention.
But Seattle is far from the only pocket of opportunity. In many ways, an argument could be made that other markets offer even greater opportunity, where forecasted population growth meets pricing that hasn’t yet reached anywhere near a peak. Panelists spoke of opportunities in Dallas and other parts of the Sunbelt, which we know has been the beneficiary of significant migration patterns dating back multiple decades.
There are many reasons for this ongoing pattern. And while warm climates are part of the story, it’s the smaller one. There are more available units, developers have an easier time with local governments in building more units, and both these options come at a rental rate that won’t get you a shoe box in Seattle and other coastal gateway cities.
Or we can explain it with another storied adage: supply and demand.
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Elliot Golan is senior vice president and a senior leader in the Allison+Partners Real Estate Practice and has spent more than a decade as an industry watcher. Prior to joining the agency, he led public relations and communications at a publicly traded global real estate services firm and served as Managing Editor of Bisnow, one of the country’s largest real estate news and events platforms.