Navigating Uncertain Financial Markets by Leveraging Multifamily Property

Fact: Inflation, fast rising interest rates, recent bank collapses, concerns about recession have all made deal financing more difficult this year than it has been in a decade.

Fiction: The investment world is doomed, and the smartest thing to do is keep your head in the sand, your money in your mattress and wait it out.

Related: Private Investors Are Frustrated by Current Multifamily Yields

Contrary to the narrative, certain real property segments—namely multifamily residential—have and continue to demonstrate solid performance. In full disclosure, that is precisely what my company does. So of course, I wave the flag of multifamily real estate sponsors—but more fittingly, so do our investors. Those seeking to preserve and grow wealth during this volatile period should at least explore this asset class. Here are four autonomous truths that support why:

1. Rent management as a natural inflation hedge

Since March 2021, the national average rent in multifamily buildings had risen from around $1,400 to just over $1,700, a 14.7% annual growth rate. Inflation at its peak in June 2022 was running only 9% annually. Additionally, rents are still rising, just not as fast as in 2022, with a nationwide year-over-year increase of 4%. The March inflation number from the U.S. BLS put annual CPI at 5 percent. Where rents are dropping, the decreases are minimal. Of the 30 major markets tracked by Yardi Matrix, only two, Las Vegas and Phoenix, registered drops in asking rents. Further evidence of multifamily as inflation protection is the trend in lease renewals. Renewal rent increases are outpacing new leases with an average increase of 9.3%, even as the national lease renewal rate remains consistent at around 64%. The ability to regularly reset rent compared to other commercial properties makes residential an ideal investment during inflationary periods.

2. Positive supply dynamics

Related: Private Debt Funds Help Fill the Financing Gap for Multifamily Investors

In 2023 and 2024 close to 70,000 new units are expected to come on-line in the New York metro—that’s the most in the country and it seems like a large number. However, a better metric for current multifamily supply dynamics is inventory growth. When measured as a percentage of total available units, new supply growth for the next two years in New York is only 2.76%, ranking 90th out of all 142 metros. Another well-documented city facing cries of oversupply is the Dallas Ft. Worth metro, which ranks second in the number of new units coming to market. Dallas drops to 29th when looking at inventory growth, with 7.74% growth for the next two years. But Dallas-Ft. Worth Metro is the fastest-growing metro in the country! The city’s recent population growth averaged around 1.4% annually since 2020 and its job growth in 2022 was 6.5%. By 2035, Dallas is forecast to grow by 1 million new residents to nearly 7.4 million people. Such strong growth should absorb any new supply in the coming years. However, let’s not forget, additional near-term supply that hasn’t already been financed will be constrained due to higher interest rates and construction costs as a result of wage and building material inflation. Limited supply is bullish for multifamily investments.