Lee Kiser is a multifamily expert, active broker and Principal of Kiser Group, Chicagoland’s leading mid-market multifamily brokerage firm.
There is a broad spectrum of commercial real estate types to consider when investing. When the economy shifts or crises occur, multifamily has consistently proven its resiliency, stability and predictability. Multifamily is doing so again during Covid-19 and its impact on commercial real estate. Multifamily properties usually fare well in all economic situations, including downturns, recessions and crashes. The reason is simple: People always need a place to live.
Apartments Weather Economic Winds
On a macro level, the success of other commercial real estate asset types is closely tied to the business environment and economy, not people and their lifestyles. The drivers for multifamily success are very different from office or industrial.
The direct driver for office investment returns is job growth, which is a function of the health of the economy, inflation and interest rates. The health of the industrial segment is determined by overseas competition, tariffs and GDP. Retail is subject to online shopping. For multifamily, none of the above is a direct influence.
In downturns or crises, people shift priorities to their most basic needs. When money gets tight, you cannot get much more essential than food and shelter. If there’s a decision to be made about where a limited amount of available money will go, the allocation for housing is high on the priority list. I’ve been a multifamily broker through several recessions, an economic crash and now a pandemic. Every single time, rents in midmarket apartment properties have remained stable, including our current crisis.
Rent Doesn’t Always Grow But Rarely Goes Down
From 2003-2008, there was minimal rent growth in the apartment sector. Capital was so available that people were increasingly buying homes rather than renting. Then the Great Recession occurred, and many who were previously buyers became renters again. Even during the rent-stagnant years prior to this crash, apartment rents never went backward; they just grew at a slower rate leading up to the crash. Apartments as an investment type then led the way out of the crisis and entered a 10-year span of unprecedented rent growth.
No Matter The Economy, Investors Need To Do Their Due Diligence
Like any investment, there are things to watch out for.
If you are a new multifamily real estate investor, your choices are buying stock in a REIT, passively investing with a sponsor or buying your own property. Make sure you take the time to complete thorough due diligence.
Some new investors want to invest in a REIT. This means they’re planning to buy stock in a company that solely invests in real estate. It’s kind of like investing in real estate yourself. There are several reputable multifamily REITs, but also some that don’t have good dividend histories. Make sure you check out the past performance, leadership and current business plan before buying stock in those companies.
Most new investors choose passive investing. On one end of the spectrum, they will give money to a family friend, or, on the other end, to a large fund. The decision to give a friend money should be based on that person’s track record. Have they done this before? Did they successfully exit the investment for their investors, or are they making good distributions if they haven’t?
For the other end of the spectrum — the sponsor of a fund — ask similar questions. Most good fund sponsors give great returns to their investors. Like in any industry, though, there are definitely some bad apples. Watch out for Ponzi scheme-type situations. Usually, when someone is growing really quickly and it sounds too good to be true, it probably is.
Due diligence also applies to any investor looking to purchase an apartment building themselves. The goal of due diligence is to confirm your assumptions from reviewing the offering memorandum and touring the property. While the multifamily sector can be a safer place to put your money than other asset classes, recovering can be difficult when putting your money into the wrong building.
Carefully review the financial and operations documentation, and inspect the property and its mechanical systems. Throughout the process, speak with experts such as a lenders, attorneys and brokers. If the seller is not willing to give you adequate time to be certain, pass. There’s always another good building to buy.
Every real estate investment carries elements of risk, but multifamily typically has less. Relative to other product categories, apartments are the “golden child” and perform well in good times and great (relatively speaking) during bad times.
Forbes Real Estate Council is an invitation-only community for executives in the real estate industry. Do I qualify?