The Unique Benefits of Multifamily Assets in Today’s Economy

The housing market boomed through most of the pandemic. However, some speculate we might be teetering on the edge of a recession. While the real estate market is cooling off slightly, including the fact that mortgage applications are down 16% from a year ago, this is not necessarily “bad news” for real estate investors.

There are many factors that are influencing the housing market right now. Some of the most significant of these are inflation, supply chain challenges, and increased interest rates. Inflation is the worst that it has been in forty years. This has kept home prices high, but it has made it increasingly difficult for people to buy homes. This in turn further increases the demand for multifamily housing, and drives rent prices higher.

Supply chain challenges have existed throughout the heart of the pandemic. This is because there have been labor shortages and major disruptions to international commerce due to COVID regulations. Supply chain issues were worse at the start of the pandemic. But, it is projected that supply chain issues will continue affecting the real estate market well into 2023.

Interest rates are also on the rise. While they hit record lows beneath 3% during the beginning of the pandemic, they are now over 5%. They could continue increasing steadily as the fed tries to get inflation under control. If the federal reserve continues to raise interest rates, then it could cause the market to go into a recession.

But despite the turmoil that is happening in the market right now, there are many advantages of multifamily real estate compared to other types of assets. Historically, multifamily assets are considered recession resistant. Here’s why:

4 Significant Advantages of Multifamily Real Estate Compared to Other Assets:

1. Short-Duration Leases

With multifamily real estate, the leases are frequently repriced. This means that unlike retail properties, you don’t get locked into 3-5 year leases. Leases for multifamily properties are usually just 1 year. This means that you can adjust the rent prices as the market moves.

This gives investors greater flexibility and a significant advantage to react to market changes. Considering the amount of volatility that has occurred during the COVID-19 pandemic in all markets, flexibility should be something that all investors should value.

2. Renewals Increase During Times of Economic Uncertainty

When there is a tremendous amount of uncertainty in the market, people tend to want to stay put. In other words, people are less likely to seek a new place to live during volatile times such as the time that we are living through right now.

Part of the reason why this is the case is because it is too expensive for renters to move, especially considering the fact that they are already dealing with the higher prices for things like gasoline, food, and oil. So, many people simply opt to renew their leases when the time comes instead of moving out, even with an increase, like they might otherwise do if things were less volatile.

This is a major advantage for real estate investors because it means that their properties will have lower vacancy levels, which means higher cash flow. It also reduces the amount of work that has to be done to do to find new tenants. More renewals equal reduced marketing and operating costs. This also helps to drive the NOI (net operating income) of the property higher.

3. Demand is High; Supply is Low

A recession, if indeed we are in one, is a short-term or temporary issue. Recessions usually do not last for that long and then the market tends to spring back. A lack of housing supply, however, is a long-term issue. Right now, there is a definite lack of housing supply. The lack of supply means that there are many more people who are trying to buy a home in America then there are homes for sale.

So, regardless of whether a recession hits or not, demand for multifamily real estate will only continue to increase, as consumers are priced out of housing market with rates going up. Essentially, what this means is that many people will continue renting because they cannot afford to buy a house, or they don’t want to get a mortgage right now because interest rates are too high.

4. Supply Chain Issues Have Nearly Halted Development

This is a major problem. Costs for building materials are too high and supply chains are bottlenecked. Both factors are going to take a long time to be resolved. This means that it is taking significantly longer to build single-family homes and new multifamily developments than it used to in the past. Builders are having trouble finding affordable materials and getting them in a reasonable amount of time.

Because of this, it is going to be nearly impossible for supply to keep up with demand for the single-family housing market. As a result, more and more people will continue to rent for longer and longer amounts of time.

For millions of Americans who are renting currently, it will just not be feasible for them to switch to homeownership in the near future. Houses are too expensive and not enough of them are coming onto the market fast enough to drop the prices.

So, What Should Real Estate Investors Do?

Real estate investors should strongly consider investing in multifamily property in order to avoid the risks of single-family and retail property investments. Some real estate investors who are used to investing in single-family properties, retail properties, or other types of real estate hesitate to invest in multifamily real estate just because they are unfamiliar with it.

If you fall into this category, then don’t worry, you are not alone. However, you shouldn’t let the fear of the unknown stop you from capitalizing on all of the tremendous benefits of multifamily real estate investing.

In fact, investing in multifamily real estate might actually be easier than you might think. With multifamily real estate, you can invest with a sponsor that will find the investments and manage them on your behalf. This cuts out the vast majority of the work.

Conclusion

Right now, it is unclear whether the market is about to go into a prolonged slump, or if it is going to push even higher. There are arguments that could be made for both sides. However, as an investor, you need to be prepared to handle either scenario.

One of the best ways to limit your exposure to risk and to hedge against inflation and uncertainty is to invest in multifamily property. Regardless of whether a recession is occurring or not, people will still need a place to live, and considering the fact that a major supply shortage is occurring in single-family homes, many people will continue to opt to rent.

Want to Invest with Ellie Perlman and Blue Lake Capital?

If you are interested in learning more about passively investing in multifamily properties, click here to schedule a call with the Blue Lake Capital Team.

About the Author

Ellie is the founder of Blue Lake Capital, a commercial real estate investment firm specializing in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.

A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.

Ellie is the host of REady2Scale, a podcast that highlights the assets, processes, and strategies for the multiple approaches to successful real estate investing.

She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.

Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.

You can read more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.