Economic Outlook for Multifamily Investment Opportunities
Long-Term Success is Still Extremely Viable
By Nate Zielinski
Over the past two years, the U.S. economy has been like a simmering pot of water that has yet to reach its boiling point.
There was a spike in interest rates across the country and inflation began to creep in and be noticeable in daily life for Americans everywhere. A lot of different facets of the economy were affected and real estate investing was no different.
Rising interest rates had a domino effect that led to affordability issues for homebuyers and tenants and even a lack of inventory for investors. However, the market has stabilized, and consumers and investors are now adjusting to the current market and looking to achieve even more success.
One of the strategies that is getting the most buzz heading into 2024 and beyond is multifamily property investments. There are mixed signals in the multifamily space currently, but it is always a path to success in the investment industry.
Record Setting Supply vs. Diminishing Demand
According to RealPage.com, there will be over 1 million new apartment units built throughout the course of 2023 and 2024, the highest level of supply in the U.S. since 1987. Undoubtedly, when these projects began construction, there was the thought that the economy would be a little more stable than it is right now, and this supply would be met with the appropriate demand.
The main factor is going to be where the progression of millennials is in regard to owning property. A lot of millennials are moving out of apartments and into single family homes. Whether they are buying or renting, there is the desire to have their own space and privacy, and the apartment life is not as appealing.
Also, the next generation, known as Gen Z, is not quite ready to rent as most are still in high school or college. This middle ground between the generations has created a blind spot for apartments, but this will not last forever.
There is some speculation from investors due to this supply and demand narrative, but multifamily investing is one of the best ways to exponentially expand wealth. Due to the supply right now, the rental incomes have stalled, so the return-on-investment questions have been raised by investors when deciding to invest in multifamily properties
In an article published on FastCompany.com, Lance Lambert states, “This influx has given renters a plethora of options and significantly decelerated rent growth, with outright apartment rent declines in many markets.”
Reasons for Optimism
While the above statement is true, it needs to be reiterated that with the Gen Z renters coming into the fold in the next few years this issue will not last. Although rents cannot be as high right now due to supply, this can also lead to easily filling every unit for investors due to rent being affordable in these larger apartment style buildings. When demand catches up to supply, investors can begin to charge more for rent year over year, and they can do this with a completely occupied apartment building due to these properties filling up when rents were low. There is obviously some patience that needs to be applied but the payoff is attainable.
Also, as stated above, the construction of these multifamily units has hit a 40-year high. Some of the markets seeing the biggest rise in multifamily units include cities such as Nashville and Austin. These two markets have seen a massive spike in population over the past few years and these people are looking for affordable housing options.
With rental rates stalling due to the supply, securing a multifamily property in these markets is a huge win for investors. These two cities are expensive to live in, so the potential of increasing rent will be there for investors to cash in on down the line. There is also a bit of a negative connotation for multifamily investment properties right now so the competition in these typically competitive markets may be at the lowest it has been in a long time.
Other southern markets that continue to grow include Houston, San Antonio, Dallas and Knoxville, Tennessee.
In an excerpt from Forbes magazine, there were some positive signs late in 2023 that displays pushback from the overarching narrative that rent growths are stalling.
“Rent growth ticked positive in October 2023, according to Zillow, after falling monthly for more than a year. The slight increase could be seasonal, aberrational or a hint that rent growth might be trending upward. I envision rent growth moderating based on several factors,” writes Michael Zaransky.
There is also the elephant that has not left the room yet when it comes to the rise in interest rates that have taken place over the past few years. A lot of potential home buyers have strayed away from purchasing a home as they wait for a decrease in interest rates. Although the preference is a single-family rental for most of this demographic, apartments are also an appealing option because they can typically be cheaper and allow the tenant to save more money before buying a home.
There is no denying that most, if not all, would prefer the SFR living arrangement, but it is not always what they can get or afford. The multifamily rental space will still have a sizable presence in the years to come.
Final Thoughts for 2024
Of course, there are pros and cons to all investment strategies. There are positive outlooks and negative ones. The multifamily investment strategy in 2024 is no different. There are certainly opportunities across the country where investors can inject themselves into bigger markets and start securing some of these properties.
The payoff may not be immediate, but securing these properties to ensure long-term success is still extremely viable and many are forecasting in the next few years that apartments and multifamily properties will be highly sought after by investors and renters alike.
Getting ahead of the curve and securing these properties can be a massive win that sets up years of solid passive income from an investor’s standpoint.
