Rent Growth and Low Housing Supply Fuel Multifamily Boom

A good economic outlook as people recover from pandemic-related challenges and low interest rates have contributed to the boom in multifamily housing investment. However, these two things on their own would not likely cause a boom, but a constrained housing supply and rising rents across the country have made multifamily housing nearly irresistible to investors.
 
Transaction Volume Proves the Boom
 
A Real Capital Analytics report identified the third quarter of 2021 as record breaking for the volume of apartment building deals. Total apartment transactions in that quarter exceeded annual volumes for the years 2008 to 2011. [1]
 
The accelerating rate at which lenders approve loans for multifamily properties proves that they agree on the value of these purchases. An August 2021 projection from the Mortgage Bankers Association estimated that 2021 lending volume in this sector would beat the previous year by 31%. [2]
 
Two Forces Constraining Housing Supply
 
Rising prices for single-family homes have dominated real estate news for years now. In August 2021, Realtor.com reported that the national median list price for a home reached a record-breaking $385,000. First-time buyers often cannot cope with these home prices. The presence of first-time buyers shopping for houses dropped to a 30-year low in May 2021. At that time, they made up only 31% of home shoppers, which means that many people are continuing to rent. [3]
 
The chances that builders will increase the supply of homes or apartment buildings in a meaningful way are low. Although the chief economist at the National Association of Home Builders said that new home construction has picked up, it will not put a dent in the problem. Experts expect persistent labor shortages, material shortages, and low buildable land inventory to prevent resolution of the problem any time soon. [4]
 
Rising Rents Attract Investors
 
Multifamily real estate investors are not driven by inventory shortages alone. The fact that rents are rising greatly increases the viability and attractiveness of investments. The Freddie Mac Multifamily Midyear Outlook cited rising rents and low vacancy rates as the forces behind big investor demand in this sector. Freddie Mac predicted that the vast majority of metropolitan markets would experience rent growth. Las Vegas, Memphis, and Fort Worth were projected to have the strongest rent growth. For the country as a whole, rent increases of 2.5% are predicted for 2021. [5]
 
Data collected in June 2021 bears out the projections from Freddie Mac in a big way. Data from Realtor.com showed that the median rent had gone up 8.1% compared to a year ago. [6]
 
Multifamily Boom Expected to Continue
 
The chief financial officer at RNC Capital told the Mortgage Professionals of America that demand for multifamily housing would remain robust for at least two more years. High home prices, shortage of housing supply, and impediments to new construction will continue to drive demand for multifamily housing by investors because so many people will have no choice but to rent. Strong rent growth coupled with low interest rates have increased investors ability to secure loans for multifamily housing. Under these conditions, the mortgage industry is not expecting demand for these properties to weaken for years. [7]
 
References:
 
[1] [2] https://www.wealthmanagement.com/multifamily/all-multifamily-apartment-boom-continues?NL=WM-056&Issue=WM-056_20211109_WM-056_90&sfvc4enews=42&cl=article_2&utm_rid=CPG09000028640659&utm_campaign=35066&utm_medium=email&elq2=dc4d044e18354727b4f2847b38298fbb&oly_enc_id=1127D5602390J7F&fbclid=IwAR3wfxpt-rwnXqWDQ4KkMC7yv5iKyCAF0QyA58YN4cFYI5GtzR6JhLrtYAs
[3] [4] [6] https://www.realtor.com/news/trends/the-new-housing-crisis-are-first-time-buyers-being-priced-out-of-homeownership/
[5] https://www.multihousingnews.com/freddie-mac-projects-return-to-pre-pandemic-trends/
[7] https://www.mpamag.com/us/specialty/commercial/boom-times-for-multifamily-space/311007