Is multifamily recession proof?

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from Brandon Dickason
Associate
Jones Lang LaSalle

Over the last few years the Capital Markets have faced trying times. Despite this, Multifamily has proven to be one of the safest investments, and continues to be the asset of choice for a cross-section of investors.

Why? The obvious reason is the bursting of the housing bubble. Fewer people can afford homes creating an increased demand for apartments. In markets like Boston and San Francisco, characterized by already low home affordability, students, young professionals, previous homeowners and empty nesters are all finding their way to the renter pool.

According to Reis, since 2006 apartments in Boston have traded at an average cap rate of 6% compared to the 5 year average office cap rate of 7%. At the height of the market in 2006 & 2007, office product yielded cap rates almost 50 bps better than Multifamily. Overall, however, Multifamily has shown more stability with cap rates never fluctuating more than 150 bps.

Fueled by a solid first half of 2010, investment momentum in this sector continues to accelerate. With extremely favorable available financing, fairly limited supply, increasing rents and lower average cap rates than other product types, investors are aggressively hunting core and opportunistic projects in large metro areas.

One example of this is UDR’s recent acquisition of six apartment communities in Massachusetts, Southern California and Baltimore for $455.1 million representing one of the largest portfolio deals of the last couple years. Each individual property sold for between $215,000 and $270,000 per unit with the exception of one in Boston’s Back Bay that traded at an unprecedented $613,000 per unit. 

Multifamily has weathered the storm. Although it isn’t immune to declining rents and increased vacancy in a down market, it does bounce back to a strong and balanced market quicker than other product types and offers lower risk. Let’s face it, people always need a place to sleep. Over the long haul they offer a safer investment.

– Brandon

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