Written by Kelsi Maree Borland
As we move later in the cycle, American Realty Advisors recommends that investors increase allocations in core multifamily housing.
As we find ourselves later and later in this cycle, multifamily housing investment is only growing in popularity—because it tends to be more resilient during a downturn. American Realty Advisors, seeing that the market has adjusted to the glut of new construction that has come onto the market in the last year, is recommending a strategic in allocations for core multifamily housing.
“First, decreasing multifamily construction activity in select areas, rising mortgage rates and home prices, and reduced benefits of homeownership create an increasingly favorable supply-demand environment going forward,” Chris Macke, managing director of research and strategy at American Realty Advisors, tells GlobeSt.com. “Second, multifamily is a good late-cycle property sector having generally outperformed during downturns and importantly, during the early stages of subsequent recoveries.”
The firm will follow its own advice and increase its multifamily allocations this year, after lowering allocations in 2015 due to increased new construction. The firm expected the market to soften as a result of the new supply, but has since seen the market overcome from the new supply deliveries. “We reduced our exposure to the property sector the last couple years in anticipation of the weakening rent growth and occupancy that occurred largely resulting from increased new supply that we saw coming instead preferring generally to wait until the supply-demand environment improved,” Austin Maddux, EVP and deputy portfolio manager at American Realty Advisors, tells GlobeSt.com. “We also observed an extremely competitive capital markets environment for suburban multifamily assets that we wanted to take advantage of and sell into.”
The firm will follow a specific strategy. First, it will focus on assets “most in demand among renters disproportionately benefitting from the country’s economic gains through disproportionate income gains,” according to Maddux. Second, it will focus on markets with strong employment and income drivers, specifically looking at markets with a strong presence of tech companies and tech education. Those markets, Maddux adds, have “more favorable long-term supply barriers also adding in some assets in markets with the strongest employment and population drivers including the most favorable business investment environment and quality of life.” Finally, the firm will focus on markets with strong transit and live-work-play environments.
While the firm is increasing its allocations, it will still be weary of new construction activity, and believes the best opportunities in markets that have seen a reduction in construction activity. “Submarkets seeing the greatest reduction in construction activity as well as continued demand from new job creation will provide the best opportunities for multifamily investment as there is wide variation across submarkets in construction activity tapering,” says Macke.
In the next 12 to 18 months, Macke says that there will be increasing opportunities in this sector. “As supply moderates in some submarkets and continues or even increases in others, there will be an increasing variation in property fundamentals performance across submarkets creating an increasingly favorable investment environment in select multifamily housing submarkets,” he says.