Why has Multifamily investment remained positive? See the below blog post to understand high level points on the asset class.
Supply Levels Lag Behind Growing Demand
While new supply is coming to the market quickly, it is important to note that construction remains far below previous construction levels of the 60’s, 70’s, and 80’s as depicted in the graph below (Marcus and Millichap 2016 Apartment Investment Forecast Research). Furthermore, current demand levels are sustainable as another Marcus and Millichap 2016 US Apartment Investment Forecast provides evidence that apartment demand is likely to continue and provides two key metrics: “23 million (millennials) living with parents” and the “Millennial Propensity to Rent” is 68% as of 2014. Together, these statistics present a case that demand for apartments will continue to outpace supply.
Changing Preferences Favors Apartment Living
Changing preferences within each segment of the population younger than 64, has led to a decline in homeownership rates. It is easy to understand young adults’ growing demand for apartments as they are on average getting married 6-7 years later than 50 years ago, they are burdened with increased education loans, and they are far less likely to drive a car (only 76.7% of the population between 20-24 had a driver’s license in 2014, compared with 91.8% in 1983 – USA Today). However, this graph shows that the appeal of owning a home has dropped significantly for multiple demographic segments. Apartment investors will benefit from the declining desire or ability for a large portion of the population to own a home.
Biggest Risk – Affordability
One major concern apartment investors must analyze is rent’s percentage of household income. The graph below presents data from Zillow that demonstrates the growing rental burden on American households. Upside in apartment investing is limited if tenants can’t afford rental increases. Rent growth could be limited as rent has become greater than 30% of Americans’ paychecks on average. Increasing rent as a percentage of household income has partially come from lagging wage growth. The Economic Policy Institute released data that shows wage growth in the last 6 years is below the historic norm of 3.5-4%.
Strong Demand Trends – Especially for Class B/C Apartments
Decreasing vacancies across the US demonstrates the growing demand for apartments. The graph below presented in Marcus and Millichap’s 2016 US Apartment Investment Forecast illustrates that demand has grown faster than the elevated supply levels throughout the US. Overall, vacancies averaged just over 4% at the end of 2015. However, the graph depicts the spread in vacancy between Class A and B/C apartments. This trend suggests that the fundamentals remain especially strong for class B/C apartments.
MLG Capital’s Investment Conclusion
MLG Capital seeks to invest in well located class A-/C+ assets in cities with strong job and population growth – within specific submarkets where household incomes can support future rent growth to achieve the greatest risk adjusted returns. MLG Capital analyzes each property in depth as well and creates a pro-active strategy to determine if, or which renovations will lead to the most cost effective rent increases. We capitalize on our market research efforts to best mitigate potential risks and position ourselves to benefit from positive economic drivers.
Here are examples of our success, research, and deal sourcing abilities being put to work:
Presidio Apartments Overview
Location: 202 units in Allen, TX (Dallas MSA) – Allen has extremely high barriers to entry and limited apartment supply in a submarket that is dominated by single family homes.
Acquisition: Off-market acquisition in 2015 through MLG Capital’s Dallas office in a dynamic, high growth submarket
Business Plan: MLG Capital planned to finish out interior improvements on the property and bring rents to market. Since acquisition the rents per unit have averaged an increase of ±$70/month.
How this acquisition compares with national trends: The median household income within one mile of the property was $68,000 upon acquisition and we projected average year one rents to be roughly 16% of the HHI within a one mile radius.
Crossroads Apartments Overview
Location: 698 units in Richfield, MN
Acquisition: Off-market acquisition in 2015 through MLG Capital’s Private Equity investment platform.
Business Plan: MLG Capital is renovating this asset with very dated units to have stainless steel appliances, granite counters, new cabinets, and vinyl luxury tile flooring.
How our acquisition compares with national trends: MLG Capital’s projected year one rents are roughly 20% of the median HHI within a one mile radius.
About the MLG Capital Private Funds:
The series of MLG Capital Private Funds were formed to acquire, directly or indirectly, a geographically diverse portfolio of commercial real estate primarily consisting of Class B multifamily properties, Industrial, Retail, and Office – located in strategically identified areas throughout the United States. This article provides you with an insight to the power that remains in multifamily apartment investing, as well as an overview of our approach. To learn more about our views or to reach a member of our team, please visit us today at www.mlgcapital.com.