The TEXPERS Blog

The Resilience of Class B Multifamily Housing By Michael Chesser, Guest Contributor

With asset values considered high and being late in the cycle, is Class B multifamily going to have a correction or move to higher valuations? This is an interesting question an investor should have of all asset classes. The following facts highlight how demand exceeds supply contributing to the exceptional resilience of Class B multifamily housing: The asset class has demonstrated persistent demand throughout the economic cycle. During strong economies and the deepest recessions, Class B multifamily occupancy rates have ranged from a high of 98% to a low of 90% in all markets across the country—a record unmatched by other real estate assets such as Class A multifamily, office or retail. It is predicted that the U.S. will need 4.5 million new apartments between now and the year 2030. It also is expected that at our current rate we will only supply 2.5 million apartments, leaving undersupply of 2 million units. Recent Goldman Sachs research shows that while a high-end supply glut is exerting downward pressure on the high-end market, vacancy rates in Class B nonetheless remain low and falling. Diverse demographic and economic trends―rising interest rates, retirees attracted to the ease of apartment living and millennials unable to buy a home in the current market―have combined to create what the Urban Land Institute has called "a firehose of fundamental demand for rental apartments, which only shows signs of strengthening." All these factors contribute to mitigate risk for investors in Class B multifamily. Effective managers can further mitigate risk through diverse strategies to generate efficient and smooth operations at the property level. Class B multifamily, as a main component of workforce housing, will be in high demand regardless of changes to the economic cycle. Working Americans want to live in clean, professionally managed housing that is close to work. The laughter of children at the pool or playground and the happiness of families that live in our apartment complexes is one reward of providing these hard-working Americans a place to call home. Another reward is the return on investment we need to serve the beneficiaries of the pensions for which we work. The qualities mentioned above of “effective, efficient, mitigate risk, and high demand” all contribute to consistent and predictable investment returns.  Return on investment for our beneficiaries, and a great place to live for our tenants; both great byproducts from the resilience of Class B multifamily. Sources: Our Vision for 2030, Urban Land Institute and PricewaterhouseCoopers, June 2017. The Case for Workforce Housing, CBRE, November 2018.  Tale of Two Markets: High-End Apartment Supply and the Inflation Outlook, Goldman Sachs, September 2018. Related sources can be found in the RESEARCH section of Aii's website; www.AiiProperties.com. The views expressed are those of Apartment Income Investors and are subject to change. These opinions are not intended to be a forecast of future events, a guarantee of results, or investment advice. About the Author: Michael Chesser Michael Chesser is president and founder of Apartment Income Investors.