Feb 14, 2023

The Attractiveness and Durability of Multifamily

Blake Walker, Director, Research & Strategy

Investors are evaluating their portfolios amid the winds of change caused by the Federal Reserve’s end to quantitative easing and the “easy money” era. The headwinds of a rising (or, arguably, even flat) interest rate environment and decelerating economy require different considerations to portfolio construction and risk, where enduring demand-drivers and cash flow durability become increasingly vital.

In that vein, commercial real estate’s multifamily sector deserves contemplation. Demand-drivers originate from the basic and enduring human need for shelter, generating both (a) an innate demand inelasticity, and (b) natural insulator against technological disruption – the latter an increasing risk factor amid accelerating technological advancements and capabilities. Healthy overall fundamentals and an underlying secular demand “tailwind” propelled by (a) a worsening US home ownership affordability crisis, and (b) increasing household formations driven, in part, by evolving societal trends like delayed marriage and high divorce rates bolster growth expectations while cushioning downside risk.

Despite these merits, multifamily pricing has retrenched roughly 10-20% below its mid-COVID peak at YE’22 1 alongside widespread repricing to stocks, bonds, and other real estate as markets turned windward over prior quarters. Current dynamics suggest further multifamily (and real estate) dislocation may emerge and will likely present an opportunity to acquire multifamily assets at a competitive cost basis with strong risk-appropriate return prospects aided by inflationary-friendly characteristics.

All said, while private real estate investments are certainly a product of the market, they are also notably influenced by investment manager acumen and execution, making manager selection critically important – and, considerably so as winds of change swirl. Under such conditions, forward-thinking managers who are shrewd, adaptable, nimble and possess value-creation capabilities at both the investment- and property-levels should stand in an advantaged position. Those who can also achieve efficiencies and better identify and mitigate risk, including through a vertically-integrated platform, the leveraging of data and technology, and advanced Environmental, Social and Governance (ESG) practices – the last of which has (a) a growing body of evidence supporting value-creation and risk mitigation, and (b) is itself symbolic of firm progressiveness and proficiency in adopting new practices – are likely to improve the likelihood of achieving risk-adjusted investment outperformance.

[1] Green Street Advisors’ estimates 20% at 4Q’22 via its Commercial Property Price Index (CPPI).