Multifamily Market Demand Remains “On Fire”

Connect Apartments brought together more than 350 real estate professionals in Los Angeles for a full day of CRE conversations and networking. Six deep-dive panel discussions featured some of the U.S.’s top CRE leaders who shared insights into the still-hot multifamily market.

The Deal Flow and Dealmakers panels featured brokers, principals, and capital sources who shared what it takes to get a deal done in this market. As the apartment market continues to change, the conversation focused on the challenges and opportunities top multifamily players see across the nation.

Passco’s Gary Goodman believes cycles don’t die of their own volition, and expects any change in the current one to likely occur as a result of a geo-political event. Yet, he says “demand nationwide for multifamily is on fire,” as it is the “only product type with good legs ahead.”

Part of what’s driving demand is the “predisposition to rent,” especially amongst the 75-million strong Millennial group. This demographic segment is putting off marriage, starting families later, and is saddled with student debt. Developers have taken note, with some even offering to pay off college loans if they buy a home. Retiring boomers are also expected to add to the increased demand for multifamily product over the coming 10 to 15 years, notes Goodman.

Goodman says, in order to capture “intrinsic value, you really have to get aggressive right now. Enormous demand and lack of supply is driving cap rates down.” Though he notes the DST investment structure that allows unlimited small investors has allowed them to raise capital “faster that I can buy properties.”

The Bascom Group’s Chad Sanderson says, there’s been a tremendous change in how housing is viewed, as Millennials are more comfortable in a rental lifestyle that aligns better with their mobility desires and frequent job changes. That’s helped drop the homeownership rate from 69% to 63% today and in the coming five to 10 years that number is expected to drop as low as 55%.

Among the reasons cited for Millennials favoring a rental lifestyle include a desire for maximum mobility and the ability to change jobs more frequently, which often involves geographic shifts. Sanderson notes a key metric they look at is the ratio of jobs to construction permits, which has Bascom focused on 15 markets today. The shortage of single family homes has helped fuel demand in the multifamily sector.

For Sanderson, getting deals done today is a simple as “rolling up your sleeves and working hard.” He advises against a “desperate capital” approach by simply “rolling on to the next deal” when competition increases the pricing beyond what your comfort zone will allow. That may mean getting “creative” or looking at “new markets.”

CBRE’s Laurie Lustig-Bower pointed out Los Angeles is priced to do well overall, as high occupancy rates are expected to continue given the long-term lack of development that hasn’t kept pace with demand. She notes there has been demand for 50,000 units, yet just 20,000 have been built creating a situation where the market has been 30,000 units short for decades – and that’s resulted in high multifamily occupancy rates in the 95% range.

Lustig-Bower notes the approach from owners is to “stick with what they’ve got out of fear” that they won’t be able to replace those assets. So today, they are “holding a little longer,” she says.

Gelt Inc.’s Keith Wasserman notes what’s helping the investor complete deals in a competitive market is their reputation as “closers and not falling out” on deals they pursue, even as the market’s shifted from being a “buyer’s market to a seller’s market now.”