U.S. multifamily real estate has historically been a resilient sector and may be a good defensive play for investors in the late-stage of the business cycle.
Multifamily has had the best risk-adjusted returns of all core real estate property sectors since 1990, explains Evans Anderson, managing director at Clarion Partners, which is why his firm has conviction around the attractiveness of this asset class through cycles. He talks to Sue Ansel, president and chief executive of apartment owner, developer and manager, Gables Residential, about the trends they are currently seeing in this segment of the U.S. residential market and why they focus on development in high-growth and high-demand neighborhoods. PERE’s Marine Cole listens in on their conversation.
Fulfilling a need
Evans Anderson (EA): As we progress further through this U.S. expansion cycle, multifamily continues to look attractive, especially given the underlying demand fundamentals that exist and the long-term investment performance the sector has delivered.
Sue Ansel (SA): Housing is a necessity. Multifamily is unique because it reflects a need that does not fundamentally change in different economic cycles. In the hospitality real estate sector, for example, demand and performance fluctuate based on changes in business travel and consumer discretionary spending.
The underlying demographics for U.S. multifamily continue to be strong. Reviewing our portfolio, we see demand coming from two key groups. First, from young people starting their lives outside the family home or graduating college and moving into the rental pool. This population segment is made up of the millennials – the 23 to 38 year olds – which is 72 million-strong, and in the next few years, Generation Z – the 4 to 22 year olds – which is about 86 million strong. Second, we are seeing demand from the Baby Boomers, defined as those aged 53 to 73, of which there are 73 million in the U.S. now and they are reaching a point in life where they are considering downsizing and moving to a community that gives them more flexibility.
Within the millennial group, there is huge pent up demand, as there are 23 million young adults currently living at home with their parents. In many cases, they left college, possess some student debt and are unable to obtain credit or the down payment required for home ownership, particularly in hot job markets. Coupled with that, there continues to be strong annual household formation across the U.S. and rising home prices. These factors support strong future demand for multifamily rental units.
EA: There are many headlines about supply in the multifamily sector and, since the global financial crisis, there has been an increase in new development in most markets. An important takeaway is that absorption has been strong too – the supply has, for the most part, met with commensurate demand driven by the factors mentioned. Multifamily is a sub-market-by sub-market and street corner-by-street corner business, so across the U.S. markets there are varying supply and demand dynamics that must be evaluated when making an investment and operating a portfolio.
The key to driving long-term investment success is building flexible and sustainable portfolios that can adapt quickly to the latest trends and resident needs
Offensive and defensive
SA: There is continued job growth in the U.S. and we are also beginning to see improved wage growth. Those trends also drive favorable demand for multifamily. The asset class ultimately has both an offensive and defensive nature, performing well through all cycles, which is attractive to investors. Our portfolio performance during the last downturn, for example, remained at 93 percent occupancy or above. When investors look at various real estate investment opportunities, they recognize multifamily has compelling characteristics, regardless of the economy.
EA: At Clarion, we have seen a number of institutional investors seeking to increase allocations to multifamily recently. A key lesson learned from the global financial crisis (GFC) is that multifamily remains well occupied during downturns as compared to other asset types that have historically experienced greater declines. There is always a degree of occupancy and cashflow in a stabilized multifamily portfolio. Multifamily is one of the building blocks to achieving durable cashflows across all cycles.
Multifamily is one of the building blocks to achieving durable cash flows across all cycles
Development and disruption
EA: As we look across the landscape of opportunities in the multifamily sector, we are developing new assets in high growth markets, acquiring value-add assets and renovating assets within our existing portfolio. For many new multifamily deals, Clarion Partners has been focusing on development of new product that we want to own for a very long time as we believe multifamily development offers attractive risk-adjusted returns.
SA: I agree that a great opportunity to create value-add returns can be manufactured through development in the current climate and an experienced team is critical to success. The cost of labor is going up, and so too is the cost of commodities and land, and expertise is required to maximize value.
Technological disruption is another trend that is impacting all commercial real estate sectors. The most visible example is in the retail area with the growing impact of online shopping on the retail brick and mortar stores as compared to the inverse positive impact on the industrial sector. The office building sector is being disrupted as a result of an increasing demand for flexibility from the workforce, whether it be flexible work hours and work locations, home office or co-working spaces. New technology is influencing all of our businesses and smart owners, operators and investors are paying time and attention to the changing trends.
Specifically, in the multifamily sector, the most immediate disruptive change has been a reduced demand for parking spaces in urban locations. The advent and accessibility of ridesharing has impacted the demand for parking spaces. New developments that are intended to have a multiple decade life need to carefully evaluate the costs of and demand for parking solutions.
Disruptive technologies will continue to influence all property sectors, so the key to driving long-term investment success is building flexible and sustainable portfolios that can adapt quickly to the latest trends and tenant needs.
Catering to a lifestyle
Multifamily property must meet the ever more granular demands and movements of today’s residents.
SA: Gables Residential is now focusing its efforts on catering to the demand for live, work, play neighborhoods. Residents of all ages want to rent apartments in lifestyle locations – that means in areas where they can walk to dinner, to the theater and to work. We are developing assets in markets that have high job growth, which is the most important driver of demand for residential property.
The Seaport district in Boston is an example of an area that has turned into a very vibrant, high job growth, high demand, live, work, play neighborhood in the last 10 years. Other markets in which we are investing today, and which exhibit these conditions include the greater Washington DC area, the greater Atlanta area, South Florida, Houston, Austin and Dallas in Texas, Denver and Southern California. In Denver, for example, we are focusing our efforts in two neighborhoods: the Cherry Creek neighborhood and the Golden Triangle neighborhood, which both meet the live, work, play lifestyle.
EA: In Washington DC, Gables has two new developments, which are very close to the new Amazon headquarters. There is also a lot of migration to southern U.S. states where the cost of living and level of job growth have outpaced some of the northern markets. In addition, millennial renters are more mobile than previous generations; they are willing to move for jobs and they generally rent because they incur less frictional cost when moving for a new opportunity.
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