Commercial real estate as a whole has been knocked from its peak, and it’s fair to say that investors today are facing a new paradigm. How is the multifamily sector faring in this context? Here we examine the near-term dynamics and longer-term fundamentals in multifamily, which we believe are supportive of select investment opportunities positioned to capitalize on strong secular trends.
Near-term Dynamics
In the zero-interest-rate policy era, any and all hard assets looked good to most investors. Location and quality still mattered, and smart investors avoided some of the crazy pricing of 2020-2022, but—all things considered—most real estate investments made sense as compared to stocks and bonds.
Today, the after-effects of the pandemic, inflation, and higher interest rates have changed everything. These material events triggered a downturn in values, a decrease in access to capital, an increase in costs, and a dramatic change from the previous era of real estate investment. Importantly, the disruption has taken a category that many investors mistakenly viewed as monolithic—namely “real estate”—and exposed how dramatically different results can be on an asset-by-asset basis and on a market-by-market basis.
Source: Green Street https://www.greenstreet.com/insights/CPPI
Multifamily real estate—one of the largest and most widely followed sectors within commercial real estate—certainly hasn’t been immune to the near-term disruptions, with property values falling more than 25% from their recent peak. Many sponsors and investors, however, are bullish about the sector’s long-term prospects. What’s behind the positive outlook?
Let’s Connect
Would you like to discuss this article with one of our Wealth Development Representatives? Fill out the form below to be connected.
reasons to be optimistic about multifamily
Key fundamentals in the multifamily sector—such as net operating income and vacancy rates—are supported by one crucial driver: sustained demand. Several factors are fueling continued demand for rental units, including demographic shifts and the unaffordability of homeownership.
Demographic shifts boost demand for multifamily housing
According to data from the Joint Center for Housing Studies of Harvard University, the overall number of renter households continues to tick up, moving above 44 million in 2023, equal to 34% of US households.[1]
Strong demand for rental units comes from a range of demographics, including baby boomers, millennials, and Gen Z households.
- Millennials renting later in life – The number of renter households headed by millennials grew by 6.2 million between 2009 and 2019 to reach 16.2 million. Though some millennials are transitioning to homeownership, many are renting later in life than prior generations thanks to tougher job prospects, lower wages, and higher student loan debt.
- Gen Z joins the rental pool – While millennials are expected to remain a large source of rental demand in coming years, Gen Z is poised to be the source of growth in renter households. In 2022, Gen Z individuals headed 7.9 million renter households. As more members of Gen Z enter adulthood, demand for rental housing is expected to increase, especially as more young adults choose to delay marriage and parenthood.
- Boomers enjoy the perks of multifamily – Older adults in their 70s and 80s are also an important factor. The baby boomer generation continues to seek out rental homes to support independent living while enjoying reduced maintenance, community interaction, and increased flexibility.
Homeownership increasingly out of reach
Homeownership has become increasingly unaffordable for Americans, bolstering demand for multifamily rental units. According to Redfin analysis, first-time homebuyers must earn roughly $76,000 to afford the typical US starter home, up 8% from one year ago and up nearly 100% from pre-pandemic levels.[2] In a February 2024 survey, 38% of US renters said they don’t believe they’ll ever own a home, up from 27% less than a year prior.[3]
Would-be buyers are facing several hurdles, including high mortgage rates and high home prices.
- Spike in mortgage rates hurts affordability – Mortgage rates climbed for most of 2023, peaking near 8% before dipping to the 7% range. Borrowers are contending with a steep climb from the sub-3% levels seen in 2021.
Mortgage rates are forecasted to gradually decline once the Federal Reserve begins cutting its benchmark rate. To make a significant difference in affordability for homebuyers, however, mortgage rates would need to fall quite a bit, as small changes in mortgage rates don’t translate to meaningful declines in monthly mortgage payments.
| 30-year Fixed Mortgage Rate | Monthly Principal and Interest Payment on $300,000 Loan |
| 7.00% | $1,996 |
| 6.75% | $1,946 |
| 6.50% | $1,896 |
| 6.25% | $1,847 |
| 6.00% | $1,799 |
| 5.75% | $1,751 |
| 5.50% | $1,703 |
| 5.25% | $1,657 |
| 5.00% | $1,610 |
- Home prices jump amid short supply – Home prices have surged to record-high levels with median prices well over $400,000 as high mortgage rates deter sellers and limit supply.
Other costs of homeownership are rising as well, including insurance, property taxes, maintenance, and utilities. Analysis by Fannie Mae shows non-mortgage costs make up about half of homeowners’ overall expenses.[4]
Positioning for success in today’s multifamily market
As some multifamily property owners come under pressure to sell, opportunities may arise to buy at or below replacement cost, setting the stage for attractive investor returns. Sponsors may also be able to pursue adaptive reuse or infill projects to create multifamily housing. In our view, the low basis at which investors may be able to buy today offers a historic wealth building opportunity—if timed and executed correctly.
Investors who are acting now are quietly participating in what we believe is the best market since 2011. At Caliber, for example, our SP10 project will bring much needed multifamily housing units to the Ahwatukee Foothills neighborhood in South Phoenix. Demand for rental housing options across the metro Phoenix area remains high with Realtor.com reporting the Phoenix area has the third widest gap between mortgage payments and monthly rent in the nation.[5]
Funding this project initiates the turnaround of a hotel asset Caliber acquired in 2018 that was negatively impacted by the pandemic. The project will begin with the conversion of an existing 160-room hotel to 104 apartment units with Class A amenities. This will be followed by the construction of 44 low-density townhouse units in back of the tower complex and 40 similar units on acreage recently acquired by Caliber in front of the tower. The entire complex of rentals will share access to a full suite of amenities designed to appeal to young professionals and families, work-from-home professionals, and corporate housing.
As near-term dynamics create headwinds for multifamily asset owners, market participants expect to see a growing number of distressed or abandoned assets. Sponsors who can conceptualize and execute strategies for underperforming assets have a unique opportunity to generate attractive returns for investors, underpinned by the sustained need for multifamily housing.
[1] America’s Rental Housing 2024, Joint Center for Housing Studies of Harvard University
[2] Redfin, “First-Time Buyers Must Make $76,000 to Afford the Typical U.S. Starter Home—Up 8% From a Year Ago” by Dana Anderson and Elijah de la Campa, March 28, 2024
[3] Redfin, “Nearly 40% of Renters Think They’ll Never Own a Home, Up From 27% Last Year” by Dana Anderson, April 12, 2024
[4] Fannie Mae, “What are the biggest costs of homeownership? (Hint: It’s not what you might think)” by Jaclene Begley and Mark Palim, March 9, 2022
[5] Realtor.com, “February Rental Report: Renting Now Beats Buying in All of the Largest U.S. Metros” March 26, 2024
About Caliber (CaliberCos Inc.) (NASDAQ: CWD)
With more than $2.9 billion of managed assets, including estimated costs to complete assets under development, Caliber’s 15-year track record of managing and developing real estate is built on a singular goal: make money in all market conditions. Our growth is fueled by our performance and our competitive advantage: we invest in projects, strategies, and geographies that global real estate institutions do not. Integral to our competitive advantage is our in-house shared services group, which offers Caliber greater control over our real estate and visibility to future investment opportunities. There are multiple ways to participate in Caliber’s success: invest in Nasdaq-listed CaliberCos Inc. and/or invest directly in our Private Funds.
Investor Considerations
The information contained herein is general in nature and is not intended, and should not be construed, as accounting, financial, investment, legal, or tax advice, or opinion, in each instance provided by Caliber or any of its affiliates, agents, or representatives. The reader is cautioned that this material may not be applicable to, or suitable for, the reader’s specific circumstances, desires, needs, and requires consideration of all applicable facts and circumstances. The reader understands and acknowledges that, prior to taking any action relating to this material, the reader (i) has been encouraged to rely upon the advice of the reader’s accounting, financial, investment, legal, and tax advisers with respect to the accounting, financial, investment, legal, tax, and other considerations relating to this material, (ii) is not relying upon Caliber or any of its affiliates, agents, employees, managers, members, or representatives for accounting, financial, investment, legal, tax, or business advice, and (iii) has sought independent accounting, financial, investment, legal, tax, and business advice relating to this material. Caliber, and each of its affiliates, agents, employees, managers, members, and representatives assumes no obligation to inform the reader of any change in the law or other factors that could affect the information contained herein.
| 673-CAL-072424 |
Sign Up For Our Newsletter!
Stay up to date on Caliber fund updates and more.