Multifamily Investors Are On The Hunt In 2020

February 5, 2020, Charlie Mentzer & Brad Waite, GlobeSt.com Buyers will be out in force in 2020.  That was the emphatic message delivered by attendees who took our annual survey at the GlobeSt. Apartments Conference in Los Angeles late last year.  In 2018, just 19% of the respondents to the annual Capital One survey said they anticipated primarily being buyers during the following year.  In fall 2019, 74% declared their intention to focus on adding to their holdings.

There are multiple reasons for the pendulum to have swung so abruptly.  The first is the economy.  Job growth continues.  Consumer spending remains strong.  Interest rates are low.  Capital is abundant.  Taken together, these factors produce the kind of stability that makes it easier for investors to feel more certain about the future.

Interest rates, for instance, are lower than they were a year ago, but, equally significant, they are much less volatile.  Furthermore, after years of worrying about when the recovery was going to end, investors now seem confident that moderate growth is the new normal.  With certainty and growth aligned, it is no wonder that multifamily investors are bullish on the market.

Multifamily market fundamentals are also favorable.  While the balance of supply and demand varies from market to market, demand is growing.  Part of this is the leveling out of the household homeownership rate over the last two years, which has stabilized in the 64% range according to the US Census, down from 69% in 2004-05.  The shift to renting has been particularly acute in cities.

Since 2006, metro areas like Tampa, Sacramento, San Diego, Reno, and Austin have joined such majority-renter strongholds as New York, Boston, and Los Angeles.  The growing overall population only amplifies the significance of this trend.  The result is that, on a national level, vacancies are hovering at or below 7%, rents are rising steadily, and valuations are surging.

The respondents’ positive view of the multifamily market no doubt reflected the FHFA’s announcement a month before the conference that it intended to raise Fannie Mae and Freddie Mac’s multifamily caps to $100 million each.  Although these record caps reflect significant changes in the way they are computed, the fact that the FHFA, for the first time, announced its annual guidelines before the year began was seen as a strong endorsement of the market.

Casting a Wide Net

The substantial buy-side enthusiasm among multifamily investors reveals a growing acceptance of compressed cap rates in major markets.  This reflects investor confidence that rent growth will continue, but it is also a recognition that multifamily is safer and less volatile than other real estate classes and other investment choices like stocks.  As a result, there is a growing willingness to tolerate slightly lower returns in exchange for less risk.

Investors seeking higher cap rates will find opportunities in secondary and tertiary markets.  Many cities in the Southeast like Louisville, Savannah, and Jacksonville have seen strong job growth, an influx of new residents, and healthy apartment demand.  But as national firms begin to compete with local and regional investors, cap rates will begin to compress in these markets as well.

Whether they focus on major metros or secondary and tertiary markets, investors are likely to find greater opportunity in central business districts rather than in the suburbs.  This has less to do with renter preferences — Millennials’ enthusiasm for urban living is well-known — than economic and regulatory forces.  Extensive suburban development during the last cycle provoked a reaction that has put a damper on new projects. 

Suburban land prices have risen, zoning has become more restrictive, and NIMBYism is more commonplace.  At the same time, many suburban residents, especially in gridlocked sprawling cities, have grown tired of the commute.  They see the city as a way to escape the suburbs.  Taken together, our GlobeSt. Apartments Conference attendees looking for a deal in 2020 will likely find more demand and more attractive properties in urban cores.

Finding the Right Bank

Capital One’s survey underscores the vital importance for investors of having a capable financial partner.  In a market where three out of four investors are looking to buy and only one in four intends to sell, investors can expect competition for each deal to be intense.  The prudent response is to build a relationship with a lender before they go on the hunt.

In these conditions, the ideal financial relationship should offer a variety of capital sources, including balance sheet, Fannie Mae, Freddie Mac, and FHA financing.  By presenting different options, it can help investors select the financing that best meets their needs. 

The ideal partner should also have aligned its credit and origination teams to maximize speed of execution — and possess the scale to provide certainty of execution.

In 2020, investors are going to have to work hard to find good deals.  Access to the right financial institution will separate investors who grow their portfolios — and those who let opportunity pass them by.