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Staff Report from Rastegar Property Company
- Multifamily is a historically stable investment class
- Asset class has high occupancy and affordable rents
- Demand is generated by young professionals and families leaving urban centers for affordability and quality living
- Public health concerns drive need for suburban garden-style apartments
- Direct benefit: abundant value-add opportunity
The Economics in Vintage Multifamily
We start with the pragmatic. Vintage multifamily performs well financially in several regards.
Principally, this asset class is more affordable for tenants and provides quality living opportunities in good neighborhoods. Most vintage properties fall within the ‘Class-B/C’ category. In short, these classifications represent existing builds (often pre-2000) in middle-class communities that typically need some renovation and operational optimization to maximize net operating income (NOI) and consequent value (based on the income approach to valuation inherent to income-generating properties).
Historically, multifamily experiences very high occupancy rates – in the mid 90% range since 2000, and remaining over 94% for the better part of the last decade. Despite the recession, Class-B multifamily only dropped to a little over 92% occupancy in 2009 and has steadily recovered since.
In contrast, Class-A has experienced consistent declines in occupancy in the post-Great Recession period, reaching as low as 90%. Additionally, vintage multifamily rents consistently grow at a faster rate than inflation, with an average 30-year return of 12%.
Another bonus for multifamily is the high percentage of on-time payments. Compared to August of last year, the percentage of renters paying on time has only dropped by 1.9% during this year’s COVID-19 impact. This is due both to the resilience of workers and families, and the relief provided by the CARES Act and local government initiatives.
Reduced competition is another advantage of vintage multifamily. Most new development in multifamily is concentrated in Class-A, resulting in significantly less new inventory in Class-B.
Additionally, compared to new builds, Class-B/C assets can be acquired below replacement value, are much less costly to renovate, and encounter fewer zoning approval issues, delays, missed milestones, and cost-overruns.
Incidentally, vintage assets don’t experience funding shortfalls as do chic Class-A developments with higher beta. The low risk, substantial upside, and consistent demand for middle-class rentals put both institutional and private investors at ease.
User Trends Drive Performance
We know that multifamily is a strong performer, but what is it about vintage multifamily that appeals to tenants and keeps occupancy high?
Noted previously, affordability is a primary driver. As rents continuously rise in gateway cities, secondary and tertiary markets are becoming more popular – not only for residential properties and users, but also for tech and other firms looking for better amenities, lower leasing expenses, and availability and quality of labor.
As corporate enterprises move to secondary (more suburban) markets – such as Tesla to South Austin, they’re drawing skilled labor with them that favors affordable long-term living accommodations.
Additionally, the remote working trend is enabling families and professionals to shift away from urban centers in pursuit of superior air quality, affordability, and a better environment to work and thrive.
Control Over Value in Vintage Multifamily
Perhaps the most exceptional quality of vintage multifamily is the ability to control value through expense and income optimization.
Compared to securities and other assets, income-generating residential property offers excellent potential to improve conditions and enhance amenities, thereby increasing marketability and rental rates.
Without exception, we find that every multifamily property has opportunities to more effectively manage expenses, and generate ancillary revenue streams, to boost NOI and property value in the near term.
With the multitude of viable acquisition prospects available in this asset class, we’ve found it relatively straightforward to find, vet and build a portfolio of the very best properties with low risk and tremendous income potential.
Visible in the Horizon
We’re in a dynamic economic and social environment. Accordingly, sourcing low-risk, robust investments with projected long-term stability is central to the goal of building portfolios that will weather recession or another national crisis. Vintage multifamily assets have proven to be among the most resilient classes of real estate over the last 20 years and should continue to flourish in the visible economic horizon.