Outlook 2023:
The Increasing Appeal of Multifamily Investment
Multifamily real estate investment is always attractive for those looking to diversify their portfolios and invest in a promising asset class with the potential for long-term stability, growth, and income from rent payments from multiple tenants. The outlook for multifamily investment in 2023 is looking increasingly positive, as discussed in this month’s edition of Credit Matters.
As 2022 progressed, the headwinds of inflation, interest rates, supply chain, staffing shortages, and a volatile stock market posed a threat to multifamily investment returns. Despite this, investment in multifamily properties has proved lucrative for real estate investors and remains an excellent way to diversify a more extensive portfolio.
Drivers of the Multifamily Asset Class
Multifamily investments can provide many benefits that other investment classes do not. These include steady cash flow, asset diversification, improved tenant quality, and better economies of scale. Multifamily investments also offer a relatively low barrier to entry compared to other real estate investments, such as commercial properties. Investors benefit from the ability to attract more tenants.
But, where multifamily investing really shines is its resilience to economic downturns. Multifamily assets are a great way to hedge against economic uncertainty and offer more stability than other commercial real estate investments in turbulent times.
Need for Housing
The multifamily housing market tends to remain stable during economic distress, which is why it’s become a popular option for real estate investors.
While single-family homes are more likely to experience significant price drops in a weak economy, multifamily housing tends to retain its value better than other property types.
A More Affordable Option
Due to the high prices of single-family homes that are outstripping wage increases, many aspiring homebuyers in expanding cities such as Miami, Dallas, Austin, New York City, and Los Angeles need help affording them.
Multifamily housing presents a more cost-effective option for those living in areas experiencing rapid population growth.
Ease of Maintenance
The economies of scale associated with owning a multifamily asset provide significant incentives for real estate investors.
Multifamily properties offer a more straightforward way to maintain the investment. With the units all housed in one place, it’s easier to manage leasing, repairs, and tenant concerns. This ease of maintenance leads to cost-effectiveness over the long term. A multifamily property can generate higher rental income than a single-family one.
Potential Liquidity
Multifamily properties are always sought after by both individual and institutional investors.
This gives them greater liquidity compared to other types of real estate investments. Furthermore, these properties tend to sell for higher prices or lower cap rates, making it easier for investors to profit.
The Impact of the Remote Work Landscape
The pandemic has changed many aspects of life, with one potential positive being the more widespread acceptance of remote work. This shift has brought forth two new trends:
Southerly Migration
Today, a significant portion of the workforce is more likely to decide where they want to live based on lifestyle — rather than the necessity of being close to their job.
As a result, populations have been migrating away from dense metropolitan areas in cold climates and towards warmer and more affordable areas in the south and west.
The pandemic has also created a counter-trend to the population shift away from dense city centers, with many people moving back into urban areas. This is driven by millennials’ preference for walkable communities, access to job hubs and cultural amenities, and the desire of empty nesters to downsize their housing needs and be closer to their children and grandchildren. As more businesses move towards hybrid work models, this trend is expected to continue gaining momentum in the years to come.
Real estate investors should consider downtown or near-downtown properties, as they can often provide a better risk/return profile.
Emphasis on Amenities
Tenant preferences have shifted in response to the pandemic as residents now spend more time at home.
As a result, they desire amenities such as high-speed internet, dedicated workspaces, audio-visual capabilities, and access to outdoor areas. Furthermore, there is an increasing emphasis on sustainable design features that promote energy efficiency and reduce environmental impact. Real estate investors can create desirable rental units that attract and retain tenants by recognizing these changing needs.
2023 Outlook
Multifamily real estate investments remain highly attractive to investors due to their strong fundamentals, particularly in non-coastal markets. Additionally, properties that focus on environmental, social, and governance (ESG) issues are increasingly sought after. However, real estate investors should be aware of several potential challenges in the market. These include rising interest rates and acquisition costs.
In unpredictable markets, it’s essential to go back to the basics of underwriting for multifamily properties. A conservative approach should be taken for growth and vacancy rates, as well as realistic rental prices based on data. For value-added investments, costs for improvements must include an allowance for inflation, and special attention needs to be given to loan terms to reduce the risk of increasing interest rates.
With an uncertain economic landscape, it looks like multifamily investment will remain strong in 2023. As single-family home prices continue to rise and a plethora of new products appear on the market, sales are predicted to set records next year. Moreover, occupancy rates should stay high while rental costs increase steadily.
About Our Lending Products
AVANA | Extensia Financial provides conventional financing to businesses in various asset classes. Our Commercial Real Estate loans range in size from $2.0 to $25.0 Million and generally have terms of five to ten years and amortization of up to 30 years.
Our SBA 504 1st Mortgage Loan is designed to help entrepreneurs acquire, renovate, build, or purchase commercial real estate. These loans allow the small business owner to own their building with a reduced down payment and still retain a low long-term fixed rate while preserving working capital that can be used to grow the business.
Our Commercial Construction loans support growing businesses and help preserve wealth. Our lending experts are there for every step and help guide large projects from start to finish. Our team takes the time to understand the complexities of your industry, market, and project needs and helps communicate with third parties to make sure that your construction project is completed on time and within budget.
Extensia Financial is one of the most seasoned credit union service organizations (CUSO) focused on commercial real estate.
Our lending experts have a wealth of experience in the Commercial and Multifamily sector and can guide you through each stage of the process.
Contact us to learn how we can make your dream investment a reality or apply for a loan today.
Our loans range in size from $1M to $30M and generally have terms of five to ten years with amortization of up to 30 years.