Apartment Sector Could See a Sell-Off During Q1-Q2 2020

As the 2020 presidential election looms, apartment sales could take off during the first half of the year. Given that a new advisory study released by the National Apartment Association (NAA) and the National Multifamily Housing Council (NMHC) indicates a “significant portion” of existing apartment stock is due for renovation, that could represent big opportunities for multifamily real estate investors during the first half of this year[1].

This is particularly exciting to investors who create cash flow from apartment investments by streamlining management practices, improving efficiency, and offering modern, upgraded amenities to residents. The era of “value-add” investing is likely to continue in the apartment sector if large volumes of existing properties hit the market, in large part because new construction is still lagging.

According to the report, nearly half of all apartments in the United States were built more than three decades ago, with about one in five buildings erected prior to 1959. The older buildings, housing stock built prior to 1980, serves as a source of affordable housing units, making it a particularly attractive buy for today’s investors[2].

“The renovation and repair of apartments helps preserve the country’s more affordable units,” observed the analysts. They noted economies in which these developments are sold and then renovated also benefit since jobs associated with the process ultimately contribute about $69 billion and create nearly 340,000 new jobs in the local economy[3].

It’s Time to Sell, but It’s Not Necessarily Urgent

Although the multifamily owners who do opt to sell in 2020 will likely do so prior to the November presidential elections, most analysts and investors agree that selling is still a matter of preference in this economy rather than a necessity.

“All of the indicators look normal. I think that in 2020 we will see more of the same, but with the election pending, I think that sellers will front-load their deals…because of the potential ambiguity,” Bob Hart, founder, CEO, and president of TruAmerica multifamily, said in early January.

Selling while President Donald Trump is still in office helps insulate investors’ capital from uncertainties associated both with the national economy and with fiscal issues like tax advantages and protections in terms of businesses and capital gains. Hart noted that 2020 could see developing “regulatory challenges” as well, warning, “The only headwinds we have seen are on the regulatory side, with some governments starting to show their colors on rent control.”

Hart also put the chances of a recession at only about 25 percent. “There is more fuel left in the economy,” he said. “This may be the new normal, where we see smaller recessionary dips rather than big swings.” He added that his firm is not changing its approach.

Keeping Your Multifamily Investments in Perspective

For most multifamily investors, the main attraction for owning assets in the multifamily sector is that it creates long-term, durable cash flow (in Hart’s words) and is likely to be in demand for years to come. That is, it will experience ongoing demand as long as you invest in the right types of assets.

Generally speaking, the most secure assets to obtain during the potential end of an economic expansion period are Class B and, arguably, Class C assets. These assets tend to be insulated from economic swings and offer a degree of security even in markets where CAP rates are currently compressing.

“There is still a real belief that multifamily still creates the best long-term, durable cash flow…and that is what allows people to stretch on CAP rates,” Hart observed. This cash flow is unlikely to ebb in 2020 before or after the presidential election. In fact, the multifamily sector could significantly contribute to insulating the economy from the usual turmoil associated with presidential elections in the U.S.

“The multifamily industry is an economic engine powering the economy very significantly at the national, state, and local levels,” said NAA president Robert Pinnegar.

NHMC president Douglas Bibby agreed. “Construction and renovation/repair will provide a sizable boost in jobs – and the economy – nationwide and will continue to be a hefty contribution to the country’s economy for decades,” he said.

Is New Construction a Competitive Threat to Current Multifamily?

Although some multifamily analysts have suggested in recent months that the multifamily sector might soften in the coming months as more developments hit the market and housing prices level off or fall, it is unlikely that this trend would create a significant softening trend outside of possibly Class A assets.

According to Hoyt Advisory Services (HAS), which conducted the NAA/NMHC analysis, 328,000 new units would need to be built annually “at varying price points to meet existing demand.” While this certainly represents a substantial opportunity for investors, the regulations surrounding new construction in most regions of the United States render this type of project more of a rarity than most housing advocates would prefer.

“Apartment demand is growing and the industry needs to keep up,” observed the HAS research team in its observations on the report. “However, producing enough new apartments to met demand requires new development approaches, more incentives, and fewer restrictions.” Particularly in C, B, and B+ class properties, overcoming this hurdle will likely take years. That is good news for investors in existing inventory and for those who are involved in new multifamily construction as well.

[1] https://www.globest.com/2020/01/08/apartment-sales-will-be-strongest-in-first-half-of-year/

[2] https://weareapartments.org/data/

[3] https://www.connect.media/apartment-industry-contributes-3-4t-to-national-economy/


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