June 16, 2022
The economy as a whole has been wildly confusing over the past several months. Inflation is steam-rolling our bank accounts, baby formula is nowhere to be found, the stock market has been bipolar as ever (currently in bear-market territory as of 6/13/22), crypto currencies tanked, gas prices are just sad, and Putin’s ego is causing global uncertainty.
But what about commercial real estate (CRE)? We experienced the hottest real estate market ever over the past two years. Surely CRE got punched in the face just as hard as those other asset classes, right?
Well, no not really. Not at all. CRE is still doing quite well. Wealthmanagement.com found that investor sentiment is actually 5 points stronger than it was in the second half of 2021. And 2H’21 was booming!
So rising interest rates and soaring inflation haven’t hurt CRE at all?
We’ve seen some slight decompression of cap rates (cap rate = net operating income / purchase price) in most markets. Although this isn’t entirely a bad thing, simply because it creates favorable buy-in opportunities for buyers. GlobeSt.com says “despite inflation and rising interest rates, multifamily maintains many of the strong fundamentals as it did at the end of 2021.” And according to a Wealthmanagement.com survey, rates need to rise more than 150 basis points before the majority of investors adjust buying strategies. We may get there, but so far the Fed has bumped rates 25bps in March, 50bps in May and another 75bps in June. And they are likely to hike again this summer. Regarding inflation, it will inevitably impact expenses for CRE owners/operators, but keep in mind the rent growth that comes along with it. And, don’t forget CRE acts as a hedge against inflation which means during high inflationary times like today, you WANT your money in stable real estate assets.
When looking at the multifamily real estate landscape specifically, the supply/demand imbalance (coupled with higher barriers to entry for single family homeownership) is really what stands out. But it’s like the middle child not getting enough attention. The housing shortage is still very real. New multifamily construction starts are climbing, but it won’t catch up to demand for a very long time.
The truth is, we are entering a recession. It may not be too detrimental, but everyone wants to be prepared and stay protected and as a result, we find ourselves reevaluating our investing strategies. The main question we should all be asking ourselves is; during a recession, where do I want my money sitting? My bank account is the last place, especially given 8%+ inflation. But what about stocks, crypto, some sort of commercial real estate asset?
Here is our list of reasons why we believe multifamily real estate is still a very strong, and actually safe option for investors to include in their portfolios;
- Inflation erodes cash – hard, cash flowing assets protect it
- We are entering a recession – multifamily real estate has proven time and time again to be “recession-proof”
- Housing demand continues to outpace supply – new family formation is driving demand for quality housing options
- Widening barriers to homeownership – high home prices and rising interest rates are proving to be a challenge for prospective homeowners
- Lagging rent growth – in many markets, rent growth is still lagging behind the average CPI (consumer price index). We need to continue keeping an eye on wage growth, but according to RealPage.com the annual incomes of apartment-seekers has risen 8% YoY, keeping up with inflation. This means we’re bound to see continued rent rate growth in some capacity. The Midwest especially still has a lot of meat on the bone, which we’re seeing in our target markets like Cincinnati, Indianapolis and Dayton. Stay tuned from some exciting news about the greater Cincinnati area, it might surprise!
Here are some good reads if you’d like to dig a little deeper;
- Investor Sentiment Climbs – Wealthmanagement.com
- Multifamily Holds Strong Despite Inflation and Rising Rates – GlobeSt.com
- Rent Growth Continues – Jay Parsons (real estate economist) on LinkedIn
- Apartment Market Shows No Signs of Slowing Yet – RealPage.co
- Wage Growth and Employment Act as Tailwind to Continued Demand – Jay Parsons (real estate economist) on LinkedIn
As always, we hope this is insightful. If you’re interested in learning how to invest or discussing some of our current investment opportunities, don’t hesitate to reach out! Sign up for the newsletter below if you wish to have these sent directly to your email so you don’t miss a thing!
Kevin & Mitch