Multifamily Investment Opportunities, Constraints

Multifamily remains a heated property sector. The confluence of consumer financing for for-sale homes remaining limited for many, coupled with a shifting demographic desiring flexibility and mobility over home ownership, keeps demand for rentals high. With an eye toward rental growth and long-term appreciation, many individual and institutional investors are jumping into the frenzy and capturing ideal assets. However, even as inventory is rapidly being absorbed, attractive investment opportunities still exist for opportunistic investors.

The ability to capitalize on the sector requires targeted strategies. One such strategy is to identify, acquire, rehabilitate and reposition well-located ,mismanaged, multi-generational assets. Upgrading these assets and bringing them closer to the standards that renters would seek in a home purchase gives investors the right clients with a corresponding ability to drive rents higher, enhance cash flow and generate strong returns for the property owners.

Highly amenitized apartment communities in, or near, the urban core represent some of the best opportunities. These assets, while generally priced more aggressively, pose a means for investors to directly address and capitalize on the surge in renters looking for urban living options. Renters are flooding the country's major metropolitan areas looking for rental units and this demand is not just coming from younger generations, but also from older generations. They all share a desire to reside in culture-rich environments where commutes are dramatically reduced, the maintenance of a large suburban home is eliminated and the vibrancy of the city is preferred.

Investors have taken notice of this urban living trend, as well as the still limited ability of consumers to obtain the financing necessary to purchase homes. And these investors have flooded the market, taking advantage of the existing growth opportunities. However, while these opportunities exist, challenges are increasing, especially as the current cycle progresses.

The saturation of investors in the multifamily sector is resulting in a thinning product line. A limited supply of attractive acquisitions drives up competition for those that remain.  Drilled down further, the supply of assets ideal for an opportunistic investment strategy is getting absorbed.  And interest rates complicate matters. While still low compared with historical norms, they are rising, further constraining acquisition opportunities.

Common with any in-demand property sector, the pool of qualified and available contractors and sub-contractors has also begun to shrink. Many left the industry during the downturn and owners and developers engaged many of those that remained. This reduced labor supply drives labor costs up and hence total project costs.

Still, despite the challenges, the multifamily sector will remain a prime investment opportunity for some time—especially for savvy investors with strategic plans that address the living trends and needs of the nation's new renter profile.