Multi-Family Commercial Real Estate

By: Kasey Watkins, Data Ninja for Cressy Commercial Real Estate

Multi-family commercial real estate was the second highest property type in demand in 2020. Even with the slowdown of most investments during the 2020 pandemic, both multi-family and industrial sales volumes continued to remain higher than all other property types. The combined national sales volume for industrial and multi-family product was $250 Billion. Whereas office, retail and hospitality had a total of $143 Billion.

Low commercial interest rates at just 3.5% are part of what is driving the increased investment in the real estate market. The “low risk, high reward” is the mindset of investors, however, even with property values elevated investment property remains in high demand. In some cases, investors are willing to pay higher prices for the same amount of income, due to the long-term value and appreciation rates. The Mortgage Bankers Association estimates that multi-family accounted for 72.9% of all commercial mortgage production in 2020. The two largest multi-family lenders—Fannie Mae and Freddie Mac—are expected to have substantial capital availability to support the increased buying activity in 2021.

Generally, multi-family property is considered the most stable asset class. If enough cash flow is generated by the property, expenses for maintaining the property are significantly offset, creating a larger financial return on the investment. With proper maintenance and upgrades, new tenants will become attracted to the property and rental rates can be increased. The more income a property generates the higher the appreciation value is. Additionally, multiple renters mean many sources of income. Since you are dealing with multiple tenants paying rent, the chance of complete vacancy is relatively low.

Multi-family properties are broken into three classes; A, B and C. Class A buildings generate the largest amount of cash flow and typically command the highest rents. In addition, these first-tier properties are known for providing top amenities, are well located, professionally managed, and built within the last 15 years. Class B buildings bring in lower rents, may have some deferred maintenance, and the buildings are less likely to be managed. With proper restoration and upgrades a Class B building can be upgraded. Class C buildings have the lowest rental rates and are the least desirable of the three property classes. Class C apartments are usually over twenty years old and may require exterior and interior renovation.

An increasing amount of the population are renting verses owning their own home. Some of the benefits of renting are maintenance free property, amenities, no down payment, fewer financial requirements, and easy relocation. The debt-to-income ratio, due to student loans is too high in most cases for millennials, which hinders housing financing. The National Multifamily Housing Council (NMHC) rent tracker over most of 2020 has shown that multi-family collections in large institutional investor-owned properties were holding up nicely, typically within 1% of 2019 levels. According to the United States Census Bureau, 89.1% of the housing units in the United States in the fourth quarter 2020 were occupied and 10.9% were vacant. Owner-occupied housing units made up 58.6% of total housing units, while renter-occupied units made up 30.4% of the inventory in the fourth quarter 2020.

Currently, there are fewer than three months of supply of homes on the market, the lowest on record since the turn of the century,” says Matthew Speakman, an economist at Zillow. As of December 2020, the number of homes on the market for sale has decreased 23% compared to one year ago. According to the National Association of Realtors, the total number of home sales in 2020 has increased 22.2% since 2019, making this the highest annual growth in 14 years. As a result of high demand, inventory has tightened significantly resulting in inflated asking prices. The housing market, compared to 2019 in 2020 has seen a 12.9% uptick in asking prices since 2019. As of January 2021, the average price of a previous owned single-family house in the United States is $260,000 and the cost to build a new home is $334,000. The average monthly rent for a three-bedroom apartment is $1,284.

The multi-family sector of commercial real estate captivated the attention of investors in 2020. As the inventory scarcity continues, a boom in new buildings have started despite high construction costs. With commercial interest loan rates at 3.5%, investors are finding it a prime time to invest the market. With proper research and strategizing, investing in real estate can be profitable in terms of cash flow and revenue. Unlike other divisions of real estate, people are dependent on multi-family for shelter and basic needs making this asset class balanced.