Apartments Would Withstand a Recession
Multifamily assets offer investors a safe harbor in a possible economic storm

real-estate-investingRecent reports on apartment fundamentals show that multifamily would weather a recession. While well-priced units would fare the best, properties in all classes would do fine in the face of a downturn, thanks to employer-driven growth in areas with strong overall demand.

Marcus & Millichap’s John Sebree told NREI:

“In 2005 and 2006, we knew we were living on borrowed time. We knew the fundamentals didn’t makes sense. Today, the apartment industry fundamentals are so strong, I don’t think a potential recession would affect us that much.”

Although properties in certain markets might take a temporary hit in a recession, employers continue to concentrate in prime metropolitan areas. That means employees will follow and fill the vacant apartment spaces. Due to affordability, both A-class properties in suburban locations and B-class properties would likely see a surge in renters.

Homeownership would also likely decrease during a recession, say experts, which contributes to strong rental demand.

A look at the fundamentals

Lee Kiser, writing for Forbes, offers this advice to investors:

“The good news is that if you focus on the fundamentals and invest for the long term, apartments are still the most compelling product type in commercial real estate. The key reason for this is simple, if trite: People always need a place to live. For investing in apartment buildings, remember three fundamental factors of location, value-add and underwriting.”

Let’s take a look at each of those factors in more depth:

Location

The success of a multifamily investment hinges on location. For example, PointOne’s multifamily portfolio is located in metro areas and suburbs with strong job growth, employers in growth industries and excellent infrastructure, including roads, transit and airports.

A location with a healthy economy, access to jobs and transportation – and bolstered by nearby entertainment and recreation options – supports a strong multifamily sector.

A good example of a focus market for PointOne Holdings is Atlanta, where several of our multifamily properties are located.  Atlanta consistently appears on lists of top multifamily investments. Why?

  • Job growth fueled by employer headquarters and relocations
  • Rent growth; Atlanta ranked 10th in the nation at the end of 2018
  • Rent-to-income ratio of 22.1 percent (less than 30 percent is target)
  • High occupancy rates of 94 percent metro-wide, even with new supply
  • Strong quality of life and desirability
  • Six of the top 20 best suburbs for renters are in Atlanta

Atlanta also ranked 11th on PwC’s real estate markets to watch 2019. Raleigh-Durham, another target location for PointOne Holdings, ranked 3rd.

In short, PointOne Holdings’ target markets including Atlanta, Raleigh/Durham, Charlotte, Nashville, Orlando and the broader Southeast region hold great appeal for employers and residents alike. These metro areas’ desirability, and strategic geographic location for top industries, continue to support strong rental demand.

(Sources: Buildium, PwC, RealPage, REbusiness, RentCafé)

Value Add

Adding value to a property boosts its income potential and supports higher rents. In some cases, that added value takes the form of large-scale renovations, but that’s not the only way to add value (and return on investment) to a multifamily property. Other value-add strategies that PointOne employs include:

  • Customer service culture improvements
  • Management team changes to support resident satisfaction and experience
  • Community-building events and experiences, such as wine and tequila tastings, to bring residents together
  • On-site private office rentals for professionals
  • Technology that makes life easier for renters, such as electronic access for package deliveries
  • Operational changes to reduce costs and increase efficiency
  • Lifestyle amenities that appeal to renters willing to pay more

In fact, renter demographics have shifted so dramatically in the past several years that the last bullet – lifestyle amenities – could prove to be one of the most lucrative value-add strategies for multifamily investment.

Consider these observations from PwC’s 2019 real estate outlook report:

“Remaining are strong forces of fundamental demand, from an age demographics perspective. Millions of 20-somethings are still funneling along at a high amplitude into rentals, now solidly supported by a macro economy that has reached virtually ‘full’ employment. That economy has even started, slowly, to improve household wage and income opportunity for younger members of the workforce. Furthermore, aging baby boomers are increasingly renters-by-choice, in walkable, high-energy, culturally evolved communities—a financially lucrative market in the making that represents a big near-term operational upside.

The X-factor for the past seven or eight-plus years, swelling above normal the ranks of natural age-pattern demographic demand for multifamily rentals, has been a massive cohort of homeownership refugees who lost their homes during the mortgage meltdown on the demand side. Whereas multifamily developers, owners, and property managers had no hand in causing the X-factor of mortgage meltdown dynamics, a new X-factor will play a large role influencing both the challenges and opportunities of the next stretch of real estate dynamics.

The game that developers changed during the latest run—likely forever—has to do with who chooses to rent versus who has to. A lot of that recent demand, particularly for higher-end, highly amenitized, connected, urban-chic communities that have become the symbol of metro magnetism—among well-heeled younger adults and a fresh influx of retiree downsizers alike—speaks to a newly tapped class of folks who prefer renting to owning.

That excerpt beautifully encapsulates what we have seen in the marketplace for the past several years. Demand for multifamily remains strong, and it’s not simply because people can’t afford to buy homes.

In addition, suburbs have now become desirable locations for many renters-by-choice. With more urban design and aesthetics, walkable areas and access to transit, many suburbs now have as much appeal for residents as urban centers.

Americans have fundamentally shifted how they look at their housing options – and renting now shines as the more attractive option for many people. That “X factor,” as PwC calls it, now contributes to steady demand that will help support multifamily through economic downturns and upturns alike.

Underwriting

Kiser ended his advice to investors with some notes about savvy underwriting. You can read his specific notes here, but investing with PointOne Holdings means that we take care of that aspect for you. Our team has more than 50 years’ combined experience, and we have nailed down our asset acquisition philosophy to safeguard our investor’s principal and maximize their return-on-investment.

We are always happy to discuss these specifics with you, so please don’t hesitate to ask.

Final Thoughts

While nobody knows when a market correction or recession will hit, history and experience indicate that one will come in the relatively near future. Those swells and contractions are a normal part of the economy, and creating a diversified investment strategy can help give you confidence during the slumps.

Experts often point to real estate as a wise addition to a strong investment portfolio. Multifamily real estate, in particular, holds up remarkably well during economic slow times.

We always welcome your questions, so feel free to reach out to anyone on our team at any time.

About PointOne Holdings

PointOne Holdings is a real estate investment firm headquartered in South Florida and Atlanta with properties located throughout the Southeastern United States and Texas. The firm owns and manages a diversified portfolio of residential and commercial assets valued in excess of $730 million. PointOne Holdings’ core principles are founded on precise investment selection, thorough due diligence, creative deal structuring, strong financial management and proactive and responsive communication. PointOne Holdings’ principals are seasoned professionals with over 40 years of combined experience who have collectively conducted over $1.9 billion in real estate transactions. For more information visit www.pointoneholdings.com

PointOne Holdings is a vehicle for investors to directly own income-producing real estate and benefit from all the advantages of ownership without the burden or risk of hands-on management. The firm’s targeted acquisition strategy, focused asset management style and attention to detail result in cumulative investor returns targeted at 12 to 15 percent annually. Returns are composed of annual operating cash flow including quarterly distributions, plus proceeds from the sale or refinance of assets. Along with the quarterly distributions, PointOne Holdings provides sophisticated reports and statements to its investors, including financial and operating information. PointOne Holdings’ principals invest in all its deals and are directly involved on a day-to-day basis, executing the firm’s vision with a methodical, entrepreneurial, and owner/operator approach.