Inflation, high-interest rates, and a recession will make 2023 a challenging year for real estate. Though inflation softened in late 2022, it was still running at more than 7%. The biggest threat to the housing market in 2023 will be inflation.
One of the best strategies savvy investors use to protect themselves from the harmful effects of inflation is investing in multifamily real estate. It’s served as a high-quality inflation hedge for generations.
Multifamily investment can serve as a hedge against inflation by offering the opportunity to reset lease rates as frequently as every 12 months, compared to three to 10 years for other property types. This provides managers with the flexibility to quickly reset pricing to meet demand or offset rising operational costs.
Historically, apartment rents have tended to outpace overall inflation rates. However, the potential for pushing rents upward will vary by how cost-constrained each market is, so strong local knowledge and acquisition selectivity is essential.
Inflation’s Effect on Multifamily Real Estate Investments
Historically, the government has set the inflation target at 2%. It hasn’t risen above this percentage since the Great Depression in the 1930s. However, due to the COVID pandemic’s effect on the economy, the government has decided to allow inflation to surpass 2%.
The effect of this on the economy will play out over the next several years. However, there are already noticeable changes when it comes to inflation’s impact on multifamily real estate investments.
As inflation goes up, so do interest rates. The price of buying a home has increased, leading to difficulties for first-time home buyers in particular. As more people struggle to secure a home, it leads to extended time renting properties.
As more people look for stable housing, they often turn to multifamily properties. As the demand for rental properties increases, this allows property owners the opportunity to increase their revenue. One asset class that’s becoming increasingly popular as a strategy to beat inflation is multifamily real estate. Often, the type of loan secured by a multifamily property is long-term and fixed-rate.
Aside from the revenue from tenants, multifamily properties are also likely to increase in appreciation as inflation increases. The same effect due to inflation that limits potential home buyers can benefit investors because the value of homes will increase during inflationary periods
MULTIFAMILY REAL ESTATE AS A STRONG INVESTMENT OPTION
Real estate is well-known as one of the more resilient investment vehicles through market downturns and years of high inflation, but the multifamily sector has some unique benefits that make it an exceptionally attractive investment. Multifamily Real Estate is a strong investment option because:
- Multifamily Real Estate Has Intrinsic Value
Multifamily real estate is a necessity-based asset and its values have soared in the past couple of years, making it difficult for investors to find opportunities with substantial upside. Further, residents experience friction, such as time, cost, and effort if they are to move. These factors suggest that multifamily real estate holds an intrinsic value and can lead investors to stable or potentially increased cash flow, despite inflation.
However, a value-add strategy allows an investor to purchase an underperforming asset at a discounted price and significantly increase its value through renovations, improved management efficiencies, and increasing rents.
- Demand for Multifamily Real Estate is Rising
Multifamily homes are becoming increasingly popular. Why? According to research, Millennials are moving into homes later than the Baby Boomer generation prior. Moreover, Millennials are still experiencing the effects of the recent 2020 financial crisis. Additionally, Generation Z is entering the workforce with record-low savings rates.
This suggests most Gen Z will not be putting a down payment on a single-family home anytime soon and will be more likely to choose multifamily housing. While home prices have started cooling off, higher mortgage rates are making homeownership even less affordable. This means buyers are still being priced out of the market and more people are choosing to rent.
- Multifamily Real Estate Supply is Stagnant
Inflation typically results in price increases for construction. As a result, many development projects are postponed or delayed. These delays can decrease new supply, make new homes more expensive, and lead to a rise in demand.
- Rent Rate Raising Due to Inflation
Rent rates across the nation have continued to trend upwards, climbing year over year. The average rental rate for a one-bedroom apartment is up 26.5% and two-bedroom apartments are up a similar 25.7%. Rent raises allow investors to combat the effects of inflation.
- Multifamily Leases are Short Enough Hedge Against Inflation
Multifamily leases typically last no more than 12 months. This allows landlords to increase rents to coordinate with the annual rate of inflation. These increases can help real estate investors stabilize or potentially increase cash flow. Additionally, their multifamily investment appreciates in value.
- Multifamily Real Estate Recovers Quickly
Investors often view multifamily real estate as “inflation resistant.” Why? This form of investment doesn’t typically drop in value as much as other assets during challenging market times. Additionally, multifamily real estate tends to recover faster than other investments.
For example, during the COVID-19 pandemic, the demand for other assets, such as office and retail buildings, dipped. However, the demand for multifamily real estate remained high. Short leases allow investors to utilize this demand and adjust rent raises.
Inflation drives up the prices of most goods and services while decreasing the purchasing power of a dollar. This can spell trouble for many businesses and investments, but multifamily real estate has a unique opportunity to thrive during times of inflation. Rental prices and the appreciation of the property are likely to increase as a result of inflation, and this can lead to a substantial payoff for property owners and investors alike.
As informed investors we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.
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What is multifamily real estate?
Multifamily real estate refers to properties that house multiple families, such as apartments, townhomes, and condominiums.
Why is multifamily real estate a strong investment option?
Multifamily real estate is a strong investment option because it provides consistent cash flow, serves as an inflation hedge, offers diversification, and has the potential for long-term appreciation.