An Asset for all Times

U.S. multifamily real estate

An Asset for all Times

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.

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
Sue Ansel, Gables Residential
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
Evans Anderson, Clarion Partners
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.

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.

Investment in real estate entails significant risks and is suitable only for certain investors as part of an overall diversified investment strategy and only for investors able to withstand a total loss of investment.

Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as, investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.


Important Information


All investments involve risk, including possible loss of principal.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.

This material is approved for distribution in those countries and to those recipients listed below. Note: this material may not be available in all regions listed.

All investors and eligible counterparties in Europe, the UK, Switzerland:

In Europe (excluding UK and Switzerland), this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office 6th Floor, Building Three, Number One Ballsbridge, 126 Pembroke Road, Ballsbridge, Dublin 4, D04 EP27. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

All Qualified Investors in Switzerland:
In Switzerland, this financial promotion is issued by Legg Mason Investments (Switzerland) GmbH. Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.

All investors in the UK:
In the UK this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444

All Investors in Hong Kong and Singapore:

This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.

This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

All Investors in the People's Republic of China ("PRC"):

This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC's commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC's commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.

This material has not been reviewed by any regulatory authority in the PRC.

Distributors and existing investors in Korea and Distributors in Taiwan:

This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (109) Jin Guan Tou Gu Xin Zi Di 016; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.

This material has not been reviewed by any regulatory authority in Korea or Taiwan.

All Investors in the Americas:

This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC.

All Investors in Australia and New Zealand:

This document is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827).  The information in this document is of a general nature only and is not intended to be, and is not, a complete or definitive statement of matters described in it. It has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

The aforementioned Legg Mason entities are wholly owned subsidiaries of Franklin Resources, Inc.

Outperformance does not imply positive results.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.