Multifamilies for Mainstreet: Building a Path Towards the American Dream

November 6, 2019

For a variety of cultural reasons, the final months of the year are often a time of reflection and appreciation among American households. As the nights grow longer and the weather grows colder, families are brought together in gratitude for the things that often go overlooked during the rest of the year, their jobs, their health and their homes.

However, the reality of the American Dream circa 2019 is that a family’s home is increasingly not their own. Since the depths of the 2008 financial crisis, homeownership has become less attainable than during any time in recent history. Household data from Pew Research provided below shows the number of homeowners shrank by almost 1 million between 2008 and 2016, while both the number and ratio of renters skyrocketed to their highest rate in more than 50 years over that same period.

Image source: Pew Research

Of course, homeownership is only one aspect of the American Dream. Despite the prevailing economic challenges many face, families are still being built as people continue to live their lives and work towards a day when they will be able to own a home, full stop. Thankfully, the continued growth in multifamily apartment construction and renovation has allowed individuals to start and grow their families while they
weather a historically tight housing market. And by investing in the development of multifamily properties with price points attainable to main street renters, today’s commercial real estate investors can play a valuable role in this transitional milestone towards the American Dream.

 

A New Life on Lease

Despite the broader economic recovery since the 2008 financial collapse, recent data from the U.S. Census Bureau reveal that 2019 homeownership rates in the U.S. continue to fluctuate below 65%, substantially below the decades prior and even the years immediately following the recession. In spite of the relatively low ownership ratio, the housing market itself is tighter than it has ever been. Housing prices have been at record highs for nearly three years while inventories have remained below their pre-2008 levels.

Data Sources: S&P/Case-Shiller Home Price Indices, U.S. Census Bureau
Image Source: FRED Economic Data

As a result, multifamily real estate continues to experience particularly active development up through this year. According to the RCA’s Commercial Property Price Index, property valuations for multifamily real estate has surged more in the past three years than any other commercial real estate property segment, and prices for these properties are now roughly 75% higher than they were in before 2008.

Image Source: Real Capital Analytics

Meanwhile, the vast majority of U.S. rental markets fluctuate below 5% vacancy rates, which in turn has supported a surge of investment into multifamily construction. Based on recent data from the U.S. Census Bureau, multifamily housing starts over the previous five years are higher than they have been since the late 1980’s.

Data Sources: U.S. Census Bureau
Image Source: FRED Economic Data

While there are a variety of influences supporting the demand in multifamily rentals, many relate to the economic barriers that currently surround homeownership. This is particularly true for the demographics hardest hit by the 2008 financial crisis, such as certain minority groups who suffered outsized foreclosure rates as a result of the collapse as well as younger individuals and new families facing low and stagnating wages, massive educational debt and diminished economic mobility following the downturn. Underscoring this fact is a recent survey from Apartment List which reveals that 12% of adults age 22-37 believe they will never own a home and will instead “always rent.” Even if this belief changes over time in accordance with an uplift in macroeconomic optimism, nearly half of that group has insufficient
savings for a potential down payment any time in the near-medium future.

While these systemic economic challenges currently show few signs of abating, the current uptick in rental property investment is helping to fill the need among these groups for safe, reliable shelter in a time when the rest of their lives may seem uncertain. As more properties are built and competition drives down rates and improves renter expectations, leasing can offer a stable way for individuals to establish a family and plan for their future home.

 

Who’s Renting What?

While every family’s financial plan differs on the specifics, one ubiquitous, underlying factor today is the drive to save as much money as possible. In many major cities, the average rental rate can be as much as 30% to 45% of a resident’s average income and families are desperate to find safe and affordable housing in the face of constrained single family housing supply and increasingly unaffordable real estate purchase prices.

The demand among this dramatically underserved area of the rental market presents a significant opportunity for the development of Class B and C multifamily properties, which are generally more affordable thanks to their older build and at times less prestigious locations. Because these lower-rated properties are still able to provide for their residents’ basic needs, investments and renovations aimed at updating these buildings into more upmarket but still accessible multifamily housing may result in a far better rate of return than more ‘up-market’ real estate investments.

In addition to being bolstered by demographic evidence, this value-driven argument also ties into the overall surge in multifamily real estate values. Top-of-the-market buildings in dense urban areas have reached a saturation point that has muted their capitalization rates in spite of the high rental demand. While Class B and C properties in some submarkets may also face similar saturation levels, they ultimately carry a better cap rate in aggregate by virtue of the lower cost of the underlying real estate.

Ultimately, it’s this real estate calculus that suggests strong demand in multifamily properties for the foreseeable future. In the vast majority of housing markets across the U.S., it’s simply more affordable to rent than buy. And for the majority of Americans who are working to support their families, they simply can’t afford to spend a third of their paycheck or more on housing.

 

A Multifamily Home for the Holidays

While these aren’t the most optimistic trends to be dwelling on in the holiday season, they are top of mind for many families throughout the year. And while there are no easy solutions to the economic malaise some individuals and families are faced with, investing in affordable multifamily properties can serve to benefit both investors and renters alike by providing improved price competition and better conditions
among these properties.

It’s for these reasons and more than iintoo has a strong focus on sourcing and funding promising value-add multifamily asset deals which can deliver lasting benefits to the property tenants and investors alike. Our real estate investing platform gives individual investors the chance to directly invest in a broad range of pre-vetted properties spanning the entire U.S. and receive ongoing support and project updates throughout their entire investment lifecycle.

And over the long run, these investments may help many families weather leaner economic times, potentially spurring a new class of homeowners once residential property prices find equilibrium with the average American’s paycheck. Until then, families across the U.S. will continue to come together to celebrate the end of another year, in many cases under the same roof.

 

To learn more about what iintoo can offer you, feel free to explore our platform.


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