Wouldn’t it be nice if every real estate investor had access to a crystal ball that would accurately reveal the movement of their market segment during the coming year? We know that’s not going to happen, but we do have access to information from multiple reliable, authoritative sources that will allow us to make investment decisions based on something other than a blind guess. As of this writing, it seems safe to say that the multifamily market is well positioned for a profitable 2022.
Kent Ritter is an experienced multifamily investor and operator helping you to build real wealth through real estate syndication. Learn More.
Factors Impacting the Multifamily Market
While 2020 and 2021 were tumultuous ones for the nation politically, socially, economically, and in just about every other way, due in large part to a global pandemic, expert predictions about the multifamily market rely on an analysis of certain immutable macroeconomic factors, namely: demographic trend, economic conditions, supply and demand, location, and interest rates.
Specific numbers and the direction of trends may shift with time, but these remain key factors influencing investment decisions in the multifamily real estate market. All predictions regarding market conditions must take these factors into account, singly and in combination with each other, but there is no guarantee that the conclusions drawn from them will hold true in the real world. Absent a crystal ball, however, they do provide a basis for informed decision making about multifamily investing.
“Demographics” are a big umbrella category under which numerous factors shaping the demand for rental housing fall. Population increases bode well for multifamily investors, but only if they are occurring among the population segment comprising likely renters. An increase or decrease in the population of young, single adults will have a bigger impact on demand for rental units than a similar increase or decrease in the number of young families, who are more likely to be looking for their first house.
Millennials are key drivers of multifamily demand because they are in the age group that is most likely to rent rather than buy. A large population of homeowners nearing retirement can also create demand for rental housing as they downsize to reduce expenses and eliminate yard work and home maintenance. Income level is another key demographic factor influencing the type of rental housing desired and the rents that can be charged, which in turn affects return on investment.
The overall economic health of the nation or of a particular area also plays a major role in making decisions about multifamily investing. The state of an economy is influenced by and measured according to many factors, including job growth, real wages, inflation, consumer confidence, asset values, and more, but the average real estate investor can rely on experts to interpret those signs and provide a general reading on the direction and rate of economic movement.
Good economic times and job creation tend to be magnets that attract people from other areas and spur population growth and the demand for rental housing. Periods of slow economic growth or economic contraction and rising unemployment can also increase the demand for rental housing as some current homeowners become renters and potential first-time buyers delay becoming homeowners.
In periods of inflation such as the U.S. has seen in recent months (with the 6.8% growth in inflation in November 2021 setting a 40-year record), multifamily properties provide a time-tested hedge for investors. As multifamily property values increase over time, rents can be increased, resulting in a better ROI.
Supply and Demand
Supply and demand are so closely interwoven that it’s difficult to discuss one without bringing up the other. Supply at any given point in time is a function of current vacancy rates; future supply also takes into account multifamily properties under construction and the number of units that soon will become available. Building activity in the multifamily sector is determined by current and projected demand for rental housing in a given area, but the rate at which new multifamily housing becomes available also is affected by labor and supply chain shortages, zoning restrictions, and financing issues, as we saw in 2020 and 2021, and expect to continue in 2022.
During the last quarter of 2021, the demand for multifamily housing was very high, while vacancy rates, at 5.8%, were extremely low. The low vacancy rate reflects the rapid rise in single-family home prices, which put home ownership out of reach for many renters who would otherwise have become first-time buyers. Not only is demand expected to keep up with supply in the multifamily market, but it is also driving up rents, which makes multifamily properties all the more attractive to investors. At the same time, high demand is driving new multifamily construction, which could eventually increase vacancy rates, slow the increase in rents, and dampen ROI for multifamily investors, though that is unlikely in the near future. The imbalance of supply and demand in the multifamily market is expected to persist for years, with demand continuing to grow as supply expands.
The U.S. population tends to migrate from one region to another in pursuit of employment or a certain lifestyle. During much of the twentieth century, there was a great migration from the rural South to the industrial North, but in recent decades the Southeast has seen the greatest population growth. This Sun Belt migration has been driven by job growth and by the advantages offered by a milder climate. It was accelerated by the pandemic-driven transition to remote working arrangements and desire of many to leave high-density urban population centers for smaller cities and towns.
A 2021 report by Owl Labs on the state of remote work found that 71% of people who began working from home during the pandemic want to continue working remotely, at least part of the time, and 38% of the study participants would even take a pay cut to do so. These migration patterns and lifestyle preferences are key factors affecting the demand for multifamily rental housing and the corresponding opportunities for multifamily investors in 2022.
After a few years of extremely low interest rates, investors are contemplating the impact that the Federal Reserve’s announcement of its intention to tighten monetary policy during 2022 will have on the multifamily market. (Two to three interest rate hikes are expected in 2022.) Historically, an increase in interest rates has mitigated against home purchases, adding to the demand for rental housing. However, with mortgage interest rates as low as they have been, prospective home buyers may rush to buy before they get much higher. For investors, the primary concern with an increase in interest rates is the impact that the higher cost of financing may have on ROI.
Interest rate increases can have advantages for investors in multifamily properties. With high home prices and competition from institutional investors buying up single-family homes, people who can’t find a home in their price range are remaining in rental housing, which increases demand and makes multifamily properties more attractive to investors.
The Wild Card: COVID-19
To say that the U.S., like the rest of the world, was caught off-guard by COVID-19 would be an understatement. On January 20, 2020, the Centers for Disease Control confirmed the first laboratory-verified case of COVID-19 in the United States. Less than two months later, on March 11, the World Health Organization declared COVID-19 a global pandemic. Since then, life has been a bit of a roller coaster ride for many, with a series of surges followed by declines in infection rates, hospitalizations, and deaths. As new variants emerge, there are renewed concerns and fears that the vaccinations that have been the main tool for combating the virus may not be as effective in combating them.
Initially, COVID-19 had devastating effects on the nation’s economy, but economic recovery is well underway and is expected to continue through 2022. According to Freddie Mac’s Multifamily Outlook report for 2022, the pandemic accelerated trends that were already emerging before 2020, such as the growth of multifamily markets in the Southeast and around cities known as technology hubs. The report also acknowledged that “COVID-19 is still with us, which could cause fresh waves of economic uncertainty that will likely persist throughout this year.” It’s unlikely that any fresh wave of economic uncertainty would have a profound negative impact on the multifamily market outlook for 2022, but there are no guarantees that a particular multifamily investment will perform according to expectations.
The Outlook for 2022
The main takeaway from consideration of the interwoven factors affecting the multifamily market is that the demand fueling market growth is strong and will continue throughout 2022. Though there may be some increase in the supply of multifamily properties by year end from new construction, vacancy rates will remain low, and demand for rental housing high. Interest rate increases should not have a substantial impact on ROI for investments in multifamily properties, and multifamily investments will remain an effective hedge against inflation. So, there are many reasons to be optimistic about the 2022 outlook for the multifamily market.
Kent Ritter is an experienced multifamily investor and entrepreneur empowering you to build real wealth through real estate syndication. Learn More.