Don’t let the recent lull in investment sales fool you. There is still voracious buyer demand for apartment properties even as the buying frenzy over the past several years has pushed sale prices higher. Yet many buyers are now shifting their focus to value-add “fixer uppers” that have more upside potential.
Apartment investors across the spectrum are searching for that diamond in the rough opportunity. Some investors who have gotten priced out of the market are focusing on older Class B or Class C properties that have a lower sticker price along with the opportunity to renovate and upgrade properties to create pricing power that will help them to push rents higher. Investors are finding that putting in the extra sweat equity can help deliver attractive returns in a market where rental growth appears to be slowing.
Even amid decelerating growth, rental housing is still a compelling investment play. Apartments jumped out as an early leader in the post-recession recovery. Demand for apartments were fueled by lingering effects from the housing market crash. More people shifted to the renter pool either by choice or by necessity due to damaged credit and a more conservative residential mortgage market. Now eight years into the recovery and homeownership levels are still at near historically low levels, while the renter pool continues to expand.
Data does show that vacancies rates are on the rise, but the reality is that vacancies have moved very little and are still well below historic levels. According to the ULI Fall 2017 Real Estate Forecast, apartment vacancies hit a low of 4.6% in 2015 and have since climbed 50 basis points to 5.1%. Reis puts the national vacancy even lower at 4.5% as of third quarter. That being said, the pace of rent growth is slowing. According to ULI, rents are predicted to grow at between 2.2 to 2.5% per year for the next three years.
Given that outlook, it is no surprise that investors are setting their sights on assets where there is an opportunity to add value by improving occupancies and raising rents. Oftentimes, those diamond in the rough opportunities are assets where an existing long-term owner has been operating on auto-pilot for the past 20 to 30 years. Property owners have been content to do routine maintenance and sit back and collect the rent checks every month. The aging assets may have deferred capital improvements or rents that are well below the market average.
Concerns about oversupply at the top end of the apartment market due to the surge in new Class A construction is providing an added incentive to pursue older Class B and Class C assets. The Class B and Class C properties typically represent a more affordable option and appeal to a larger pool of renters, while Class A apartments are now facing increased competition.
Broadly speaking, apartment investors have enjoyed a long recovery cycle that appears ready to stretch into extra innings. The sector continues to ride a strong tailwind of demand this is being fueled by steady employment growth and favorable demographics. Empty nesters and boomers are continuing to downsize and opt for a simpler, low-maintenance lifestyle of renting versus owner.
Multifamily also is getting a strong boost from the millennial generation. The prime age of renters is typically 20-34, and the estimated 81 million millennials that range in age from 15 to 35 fill that slot nicely. According to Pew Research, millennials headed 18.4 million of the estimated 45.9 million households that rent their home last year. Millennials also are putting off marriage and children longer, which is delaying decisions to buy a home and keeping them in the renter pool longer than what has traditionally been the norm.
That all translates to very healthy demand for rental housing. The trick is finding those Class B and Class C properties where there is an opportunity to add value and raise the bar on what the property has to offer, whether that is minor cosmetic improvements or a major overhaul to reposition the property or add new. Finding those deals in today’s competitive marketplace often means knocking on doors and looking for off-market deals. Having access to ownership information can help to open those doors.
Reonomy offers real-time access to detailed property data that business owners, investors and commercial real estate professionals need in today’s competitive marketplace. Try Reonomy National for free today.