Amid Fears of a Recession, What’s Been Driving Demand for Multifamily Real Estate?

In 1956, the world witnessed perhaps the greatest twist to a corporate tale in history.

After several years in partnership with the McDonald’s brothers, Ray Kroc had little to show for his efforts. His salesmanship had guided him into the growing McDonald’s fast food business and earned him a franchise in Illinois, but the money coming in could not outpace the costs of running up another franchise.

In the Netflix movie “The Founder,” Ray Krok’s lawyer, Sonneborn, summarizes Kork’s dilemma: “You don’t seem to realize what business you’re in,” he says. “You’re not in the burger business. You’re in the real estate business.” According to the lawyer, it would be impossible for Krok to amass a fortune franchising, but he could easily do it by purchasing the land the franchisee operates on.

So began the delectable twist which turned a fast food joint into one of the largest owners of real estate in the country. In 2021, McDonald’s reported $46.7 billion of total long-term assets, the majority of which come from property, plants and equipment. Fortunately, building fortunes through real estate is not exclusive to corporate elites; it’s available to the general investment community as a potential low-risk opportunity to generate passive income.

Here’s what the market looks like and how you could get involved.

The Multifamily Real Estate Market

In the real estate market, multifamily housing is a booming sector.

According to the U.S. Consensus Bureau, a multifamily residential property is one “containing units built on top of another and those built side-by-side which do not have a ground-to-roof wall and/or common facilities.” A common form of a multifamily residential property is an apartment building, where units are separate but stacked in close proximity to one another.

The multifamily real estate industry is one of the oldest forms of real estate and one of the most popular. According to a report by CBRE Group Inc. (NASDAQ: CBRE), the multifamily rental housing market includes 14.5 million units across the 62 largest metro markets in the U.S. The National Multifamily Housing Council (NMHC) estimates that the total value of these units is more than $3.3 trillion.

Even in 2022, as the Federal Reserve’s monetary policy ushers interest rates to a range of 3.75 to 4%, demand for multifamily real estate property appears to be holding steady. According to a report by Fannie Mae, the multifamily sector experienced strong demand in the first half of 2022, despite concerns over a global recession. This trend is expected to continue in 2022 and beyond. One strongly opinionated source has even stated that “there’s no end in sight” for multifamily housing demand.

The sustained demand is reportedly driven by fundamental factors. On one hand, a rising interest rate environment means higher mortgage payments for potential buyers, which dissuades purchases. On the other, the multiple revenue streams arising from multifamily houses, as opposed to family houses, could ease the burden of higher mortgage rates and even offset it if there’s enough cash left over.

The narrative for a strong multifamily housing market is confirmed and reiterated by market players themselves. In interviews with Multi-House News, investment arms Three Pillars Capital Group (TPCG) and Bell Partners (BP) and development arm Kaplan Residential (KR) remain positive about the multifamily housing market. For KR, opening up the business plan to include multifamily sectors has “proved to be beneficial for the company,” and for BP, value-add multifamily operations are still a target area.