Multifamily
Key Takeaways
Multifamily
Institutional multifamily real estate refers to rental properties with five or more residential units within one building or building complex. Rentals are typically one year in length with flexible leasing terms that allow owners to adjust rents upon renewal to align with macro market conditions.
Renters
The renters of multifamily units are mostly young individuals and families with incomes below $75,000. Understanding the renter market and monitoring trends is important when addressing the increase in demand for rental properties for lower income households.
Asset value
The increased number of renter households, supply shortage, and lack of affordable housing for cost burdened renters drives the need for more multifamily development nationwide.
What is multifamily real estate?
Multifamily real estate is a type of housing with renter households living in separate residential units located in one building or complex. Renter contracts are generally characterized by short, flexible lease-terms that allow owners to adjust rents to changing market conditions.
Institutional Multifamily is defined as properties with five or more unitsi and is the second most common form of housing in the United States, comprising approximately 19% of the nation’s total occupied housing units. About a third of these occupied units are buildings with 50 or more units.ii The US has about 23 million multifamily units out of which close to 90% are rental properties.iii
Percentage of Owners and Renters by Age of Householder v
Who lives in multifamily rental?
Approximately half of multifamily residents are single individuals, and the other half are households with two or more people.iv Renters tend to skew toward younger age cohorts, but nearly a quarter of older households (aged 75 and older) are renters too. While most renters’ annual incomes are below $75,000, the share of high-income renters has been on the rise, challenging the notion that rentership is solely an income-driven choice where occupants are renters by necessity rather than by choice.
What are the secular drivers of this sector?
Over a Million Renter Households Were Added Between 2021 and 2022 xi
Demographic tailwinds: The number of renter households increased by over one million to 45.2 million in 2022,vi expanding the need for multifamily housing.
Supply shortage: Both single-family and multifamily construction were slow to recover following the financial crisis in 2008.vii According to Fannie Mae, this contributed to an existing deficit of 4.4 million housing units across the top 75 metro areas.viii
Affordability: Over 80% of the newly formed renter households in 2022 were cost burdened.ix According to the National Low Income Housing Coalition, the US needs an additional 2.6 million new affordable housing units to meet the needs of low- and modest-income renters.x
Household Growth Has Outpaced Growth in Housing Stock xii
What are the common building types?
Common multifamily building types are garden style, low-rise, mid-rise, and high-rise. Low-rise, mid-rise, and high-rise have one to three, four to six, and seven or more floors, respectively and garden style apartments tend to have between two and six floors where buildings are spread out across the property and is surrounded by landscaped areas with lawns and trees.xiii
Across these property types, class ratings are often used to represent the quality of the property. Factors such as age of the property, amenities, location, can impact the rating. Class A normally commands higher market-clearing rents than Class B and C.
Garden Style
Mid-Rise
Low-Rise
High-Rise
What drives value at the asset level?
Identifying Value Opportunities During Due Diligence
Investment managers can drive value prior to acquisition by identifying highly sought after, in-demand renter locations with positive neighborhood characteristics, quality school systems, and proximity to jobs.
Active Management
Investment managers can create value through executing renovations in older units, which typically involves updating amenities and unit finishes. Asset repositioning can create opportunities to drive value at the asset level while upgraded resident services can enhance resident satisfaction and brand reputation.
Glossary
Area Median Income (AMI): Area median income is defined as the midpoint of a specific area’s income distribution and is calculated on an annual basis by the Department of Housing and Urban Development.
Cost burdened Renters: Renters that pay 30% or more of their income in rent.
Capital Expenditures: Investments made to acquire, improve, and maintain an asset.
Renters by Choice: Have sufficient wealth to own but choose to rent.
Renters by Necessity: Have insufficient wealth to acquire home/condo.
Core: Core assets tend to be higher quality, “turnkey” properties in attractive locations, and investment managers typically use a low level of leverage to acquire properties.
Core-Plus: Core plus assets are high quality properties with modest opportunities to add value through light property improvements and often more leverage compared to core properties.
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