Several factors, including inflation concerns, are attracting investors to rental housing.
Money has been flooding into the apartment industry.
There are a lot of reasons for the buyer interest. In some cases, investors in struggling segments of commercial real estate, like lodging and office, have reallocated dollars to multifamily.
Matt Ferrari, Co-Chief Investment Officer and Head of Acquisitions and East Coast Asset Management for Los Angeles-based TruAmerica Multifamily, says there is a lot of chatter among brokers that new groups are pursuing apartments. “Anecdotally, people are talking about it,” he says.
These investors and others see yields in apartments that they can’t achieve elsewhere. “There is just an incredible amount of capital, both in the U.S. and globally, looking for yield,” says Douglas Eisner, Co-Founder and Managing Director at Calida Group, which is based in Las Vegas. “And essentially there is no yield opportunity in the debt markets. And so you have to go into equity, and you have to go into hard assets.”
Looming inflation is bringing some newcomers into the apartment sector, which has shorter-term leases. Other hot commercial real estate sectors, such as industrial and life sciences, have longer-term leases.
“Industrial and life sciences have long-term fixed leases that put them behind the eight ball with inflation,” Eisner says. “With apartments, you can pass it through and you can capture that inflation. So, for those reasons, multifamily is probably the most attractive asset class and it is going to stay the most attractive for a while.”
As this happens, cap rates will continue to fall in suburban markets, Sun Belt cities and some Class B assets. “Covid has created winners and losers for markets and types of deals within multifamily,” Ferrari says.
Ferrari says falling cap rates seem to show new buyers entering the market, but that is not the only explanation. “There is also really strong growth, too,” he says.
If cap rates continue to fall, both new and seasoned apartment investors may need to adjust their return expectations.
“Cap rates are going to start to compete with yield expectations that are more akin to debt, even though apartments are an equity vehicle,” Eisner says. “There is no yield in the debt market today, and those people need to capture something.”
Les Shaver is a freelance writer.