Multi-family real estate has a proven track record of providing high risk-adjusted returns. In fact, it outperformed all other forms of commercial real estate throughout the Great Recession. Workforce housing in particular, shows continuous evidence of strong demand as the rents are deemed more affordable for lower and middle-income households. These workers include teachers, social workers, police officers, firefighters, and blue-collar workers.
Essential Human Need: Food, water, and shelter. These are basic needs for every human being. Regardless of income, there will always be a necessity for a place to live. If you do not own a home, the alternative is to rent. Some people choose not to buy a home to avoid being "tied down" to one location. Renting provides flexibility. During an economic downturn, mortgage lending requirements become stricter. When there are less financing options available to prospective homeowners, the renter pool increases. Given this essential human need, people tend to prioritize rent payments in the event they are experiencing financial hardship—over car payments, credit card payments, etc.—as failure to pay rent will lead to an eviction. This supports the notion of the necessity of shelter.
Increasing Demand: Studies performed by NMHC (National Multi-family Housing Council) show that America needs to build an "average of 328,000" apartments per year" to meet demand—since 1989, we were only able to hit that mark twice! Population migration and immigration influxes have grown exponentially in the U.S. These market trends lead to occupancy growth in apartments for years to come.
Lower Delinquency Rates: During the 2007-2009 recession, which was also arguably the worst economic downturn in U.S. history, the economy skyrocketed with high unemployment rates of up to 10% nationally. During this financial crisis, multi-family performed very well compared to other asset classes. Reports from Urban Institute show that from 2007 to 2018, delinquency rates hovered below 0.5% and at times lower than 0.1%. This phenomenal track record on extremely low defaults supports the strength of this asset class.
Sharpe Ratio: The Sharpe Ratio is a commonly used metric in finance that represents the average rate of return received in excess of the risk-free rate (e.g. 90-day Treasury Bill) per unit of volatility or risk. This is used to measure risk-adjusted returns across different asset classes, including stocks and mutual funds. A recent study performed by NMHC shows that multifamily consistently dominates other commercial asset classes on a risk-adjusted return basis over holding periods of 3, 5, 7, 10, or even 15 years! A high sharpe ratio equates to higher risk-adjusted returns.
Luxury apartments are class A properties that typically cater to high-income earners. These apartments have top-of-the-line new amenities and are commonly located in high-cost areas. The workforce housing population is unlikely to be able to afford high rents, as they may represent 50-70% AMI (Area Median Income), thus becoming renters by necessity due to their lack of disposable income compared to class A renters. Workforce housing can be seen in class B to C+ properties that are less expensive with stronger demand.
Through statistical data, multifamily has a proven track record of being a strong, high performing investment with compelling evidence of recession resiliency. The great concept of multi-family investing is you get the best of both worlds during the expansion and contraction periods of the economy. When considering investment strategies, it would be in your best interest to consider apartments if your goal is to create, protect, and grow your wealth for generations to come.
Author: Yannik Cudjoe-Virgil
Yannik formed Merlynn Acquisitions in 2017. He has experience in portfolio asset management, real estate investing, investment analysis and financial modeling.
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