Multifamily Space Benefits from Rising Affordability Gap

By Tony Cantu

Amid higher mortgage rates and soaring property values – not to mention continuing market uncertainty and the strong likelihood for further inflation – the outlook for investment opportunities may appear bleak. Not if one’s portfolio is in the multifamily sector, however, according to an industry veteran.

Al Otero (pictured), portfolio manager at Armada ETF Advisors, spoke to Mortgage Professional America about the robust sector – which has been the beneficiary of the rising affordability gap in the housing market. Otero has worked in the REIT space for 30 years.

“It’s been a phenomenal 12-month period if you go back really to the summer of 2021,” Otero said. “From a seasonal perspective – we do a lot of our annual apartment leasing between May and August – that’s really where these guys make or break their years, is during those important spring and summer leasing seasons. We started to see things pick up last year as regions of the country came out of the pandemic, and it just perpetuated through the end of last year into the start of this year.”

There’s a reason why multifamily is the darling of investors, he noted: “When you think about the apartment industry, one of the reasons why it’s so loved by institutional investors in terms of buying assets directly and so loved by real estate private equities – the Blackstones and Starwoods of the world – is because it’s an all-weather asset class. It tends to do extremely well in good times, and it holds up and turns out to be pretty recession-proof in the bad times,” he said, referring to the investment firms Blackstone Inc. and Starwood Capital Group.

Indeed, the apartment sector has benefited from the sluggish housing market, yielding the economics of renting a housing unit to far outweigh the cost of homeownership. One apartment REIT reported during a recent earnings call that the rent proposition in their portfolio was 50% cheaper than owning a home in their respective markets.

As a result, increased rental demand places residential landlords in a unique position. They have higher overall occupancy rates, retention rates and the ability to pass inflation costs on to the renters vis a vis higher leases. Consequently, rental income for REITs continues to rise, which should translate to higher dividend income payments to shareholders, Otero said…

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