Multifamily, The Post-Pandemic Investment Poster Child: An Inside Look at Post-Pandemic Multifamily Investment Trends
By Will Crystal
The effects of COVID-19 have been felt throughout the entire commercial real estate sphere and continue to impact investment decisions across all property types. The pandemic has revealed a plethora of new opportunities in the marketplace, creating trends that are expected to continue into the foreseeable future. One of the most notable trends we are seeing is an uptick in multifamily investment and financing. The combination of record-high rental rates, surging demand, and skyrocketing market values is creating financing and capital event opportunities for property owners while forcing developers and investors to get creative.
Demand for multifamily housing has spiked dramatically in the first three quarters of the year and according to data from property management and analytics platform RealPage, “absorption of multifamily units jumped by more than 255,000 in the third quarter.” This extreme increase in demand can partially be attributed to the post-pandemic job market recovery we’ve been seeing, specifically regarding middle and higher-income jobs. Peter Linneman, of Linneman Associates, “believes that 3.5 million people will return to the workforce in the next six to nine months, and there will be an additional 2 million or more jobs added as the economy continues to grow” (Linneman, BisNow). Subsequently, more people than ever before can afford apartments due to stabilizing incomes related to job market recovery. This can be attributed to “the most recent ADP data from September , indicating a [growth in] jobs [from] the previous two months”, due to the “elimination of the additional unemployment benefits issued in response to the pandemic” (Linneman, BisNow). Significantly more people are seeking employment as covid subsides and there is no shortage of available jobs, from the restaurant business to middle-income level jobs.
Additionally, the average price for multifamily assets has increased over the last 2 years, along with demand. Pricing and demand are projected to continue this upward trend in both the short and long term. In August of last year alone, there were “new construction permits totaling over 57,000 units issued across the U.S.” for multifamily development. This is the highest demand for permits in a single month since June of 2015. The trend is not expected to slow anytime soon, as 450,000 multifamily units are projected to be developed in 2023-2024.
While the demand for multifamily continues to surge as the market recovers from the pandemic, increasing uncertainty around office and retail assets has prompted many to convert those existing buildings. Both office and retail assets have seen record low occupancy rates during the pandemic. As a result, we are seeing many of the distressed properties getting converted to multifamily. This conversion strategy allows investors to capitalize on rising rents and demand in the multifamily sector, without having to buy in at the price levels we are seeing in the residential market. This trend has created a significant opportunity for developers and investors, as “renovations could cost about 30% to 40% less than new construction for the same number of units.” Not only are investors saving on construction costs, but they are also able to buy these distressed buildings at significantly lower prices than comparable existing multifamily properties in the same markets. Multifamily developers have experienced many challenges throughout the pandemic, especially regarding construction costs. These challenges and specifically the increased costs have made it difficult for individuals to start investing in the multifamily space, making the conversion strategy that much more attractive.
While multifamily investors key in on the conversion of commercial assets to multifamily given current market conditions and compressing cap rates, current property owners are able to take advantage by capitalizing on the current borrower/sponsor-friendly state of the capital markets. As cap rates compress, property owners/sponsors can get significantly more attractive debt, whether it be construction, bridge, Mezz, or permanent financing. “Multifamily cap-rate compression averaged 31 basis points in infill markets and 41 basis points in suburban markets” (ADG Multifamily). With market prices at all-time highs and the gradual increase we’ve seen in rental revenue due to record demand, it is the optimal time to get financing for a new project, refinance your existing debt, or recapitalize your equity. Investors have significant dry powder ready to be deployed in the multifamily space, whether it be a conversion or ground-up development. Meanwhile, banks, debt funds, and insurance companies aggressively look to deploy capital in both areas at rates lower than any other asset class.
Lever Capital Partners has significant experience in the multifamily space and can assist you in securing any financing needs for your next project. Whether you own an existing multifamily property and are looking to refinance or recapitalize, or you are a developer looking for construction financing for asset conversion or ground-up development, we have the resources and experience to get you what you need. We pride ourselves in our ability to bring clients a range of financing options that reflect only the best that the market has to offer.