“Acknowledging the good that you already have in your life is the foundation for all abundance.” – Eckhart Tolle
It’s hard to believe we have year-end in our sights. The crisp air and shorter days welcome a season many look forward to all year long. Thanksgiving has always held special meaning for our team. And in a year filled with so many challenges in our communities, country, and worldwide, that meaning is doubly important.
The holiday reminds us to acknowledge all the blessings in our lives. Which, for our team, includes being able to work with you and your family. We are so grateful for the trust you’ve placed in us, for your loyalty, and for your willingness to share your challenges, successes, and lifetime goals.
This Thanksgiving, we wish you health and peace of mind, along with an abundance of all good things: the love of family; the joys of friendship; and the comforts of home.
Whether you are establishing new ways to celebrate or continuing long-standing traditions, we hope you create wonderful memories that you’ll reflect upon often. And we want to hear all about it when we next speak.
Why Multifamily Investments Are A Good Option When Inflation Runs Wild
With stubborn inflation, investment triggers feel harder to pull in 2022. Multifamily real estate is a strong option.
In an inflationary environment, many investors flounder as pulling the trigger on investments of any kind can feel like higher stakes. The questions are endless. With rising interest rates, falling returns and concerns about recession, where are our dollars best placed to serve our long-term financial goals? Will I need to keep this cash more liquid in case inflation gets out of hand? Or what investments are safer when economics are shifting so rapidly all around us?
One particular category of investment is especially daunting to many, and even more so during shifting economic times—commercial real estate investing. In countless financial advisory offices this year, the question has been posed ‘is now a smart time to invest in commercial real estate?’
Our analysis points to yes, particularly when it comes to multifamily. Unlike stocks and bonds, real estate provides a strong defensive strategy against market volatility, a hedge against inflation and a wide range of tax advantages (especially in 2022). Additionally, the sector is currently benefitting from a fundamental imbalance in supply and demand, which is generating higher income and cash flows not available with other asset classes. Let’s take a closer look at the many factors at play.
There are several advantages of investing in multifamily real estate in a recessionary environment. Supply of both rental and for-sale housing is constrained, as lenders and equity partners have moved to the sidelines and new housing deliveries are delayed. Demand is increased, as renters are priced out of homeownership by exorbitant home costs and rising interest rates, and new cohorts join the rental market. Apartment occupancy rates also tend to remain firm during economic downturns, as renters are disinclined to relocate and opt to stay in the rental housing longer than they otherwise would.
Apartments are likely to perform well in both stable and rising interest rate environments. Historically, financing rates for apartments have been lower than other commercial property types, as federal backing of multifamily mortgages from Fannie Mae and Freddie Mac results in a lower risk premium than privately sourced mortgages. In fact, according to Real Capital Analytics, apartments have benefitted from financing rates that averaged more than 48 basis points lower than commercial property over the last 10 years. Apartment investors may actually benefit from demand destruction caused by higher interest rates—especially if the increase in rates is due to rising inflation, as is underway now. As homes become more expensive to buy, and new product more expensive to build, the existing inventory of rental housing becomes more valuable and in-demand.
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.
RealPage recently published a study that found the vast majority of renters were able and willing to pay their rent. While rents have soared due to a 40-year high in inflation, so too have renters’ incomes. This has kept rent-to-income ratios much lower than widely assumed, and not enough to meaningfully change apartment affordability.
The benefits to apartment investors go beyond the dramatic increase in rents. At Hamilton Zanze, operating expenses for the company’s national portfolio of multifamily properties represent approximately 40 percent of revenue. Even though rents are rising faster than inflation, if both revenue and expenses rose at the rate of inflation, our net operating income (NOI) and cash flow would still increase.
Liquidity is the biggest factor differentiating multifamily from other types of commercial real estate right now. As capital markets have largely frozen up, it has become incredibly difficult to get a loan for an office building, for example. We predict we will see a significant amount of distress in these properties, which may provide opportunities for savvy investors. By contrast, there is plenty of liquidity for apartments, with government-backed lenders like Fannie Mae and Freddie Mac doing exactly what they are supposed to do—step up to provide liquidity to the nation’s residential mortgage finance system. As a result, apartments have been spared the dramatic drop in asset values we are currently seeing with other types of commercial real estate.
Tax benefits (especially in 2022)
Total returns on real estate investment are enhanced with several tax advantages, including depreciation (particularly with bonus depreciation through cost segregation), capital gains deferral through 1031 exchanges, as well as the tax-efficient cash flow to investors considered a return of capital and reduction of basis before becoming taxable.
Smart investors will want to act quickly in the fourth quarter to take advantage of bonus depreciation, which allows purchasers to deduct 100 percent of eligible property through December 2022. Beginning with acquisitions in 2023, this benefit will gradually decrease each year until it is phased out in 2026.
As the world slowly reemerges from COVID and investors prepare for whatever lies ahead, it is important to remember that portfolio diversification is essential in uncertain economic times. Apartment properties can provide a proven alternative asset class to a well-constructed portfolio, and to a growing number of investors, the category is increasingly recognized as a “fourth asset class” and a valuable alternative to traditional investments such as stocks and bonds.
Another question on investors’ minds right now is what is happening with valuations.
Capitalization rates (and therefore asset values) are largely influenced by capital flows—more so than interest rate movements. According to Dr. Peter Linneman, “the connection between both multifamily and office cap rates and interest rates is weak, while the connection with flow of funds is the powerful driving force.”
Currently, cap rates have expanded by 10-20 percent, as interest rates have caused many funds and private equity groups to sit on the sidelines. However, there is a tremendous amount of equity that needs to be deployed for apartments and we expect transactional volume will pick back up in the first quarter of 2023. As the flow of capital returns to the market, cap rates should begin to stabilize.
According to a new report from Freddie Mac, multifamily is well positioned despite pressure on cap rates, and they expect every market they cover to experience gross income gains this year. The reason for this is that while cap rates are influenced by risk appetites, perceived uncertainty, cost of capital and market upside, net operating income (NOI) is generated through operations. Consequently, NOI growth is eroding the decrease in valuation from cap rate expansion.
Homeownership rates remain well below levels witnessed in the last recession and today’s demographic trends continue to favor renting. The prime age group for renters—typically those 20-34 years old—is still increasing in size. In fact, more than half of the nation’s total population are now members of the millennial generation or younger.
While millennials are getting older, many continue to rent, whether as a lifestyle choice or due to rising home prices and burdensome student loan debt. Gen Z has also now entered the rental housing market, which will have a significant impact in the years ahead. Additionally, due to lifestyle changes and down-sizing, baby boomers also continue to be a significant source of apartment demand.
High demand, limited supply
Despite recent increases in multifamily starts, demand for rental housing still far exceeds current supply with a shortfall of 600,000 units, as reported by the National Multifamily Housing Council and the National Apartment Association.
In recent years, apartment construction has been concentrated on class-A, “renter by choice” product in downtown or central business district (CBD) areas of the major gateway markets. This has reflected demand from young workers who prioritized prime location and amenities over living space, a preference that will likely shift as millennials seek larger, more suburban properties to start families. Developers have largely overlooked prime suburban areas, where rent and occupancy performance have outperformed downtown areas. This presents an opportunity for investors to acquire suburban apartments at more favorable initial acquisition yields.
There continues to be limited new development for properties targeted toward the more moderate “renters by necessity,” who are a stable source of demand and less likely to shift toward homeownership regardless of changing market conditions.
It is worth noting that current inflation is also impacting the upcoming supply of new multifamily product. The rising price of construction materials and labor costs may cause some planned projects not to be built and limit the development of future projects. This will have the effect of making existing product more valuable, as replacement costs increase.
While rents have been rising sharply, home prices have risen even faster. As a result, renting remains a far more affordable option than buying almost everywhere. According to recent Zillow data, mortgage payments are higher than rent in 45 of the 50 largest U.S. metros, up from 22 in 2019. Typical U.S. rents are now $2,031 per month, having crossed the $2,000 threshold for the first time this year, with an annual growth rate more than three times that of July 2019.
As barriers to homeownership remain high, which will likely hold true for some time, renting remains the most cost-effective option for many would-be-buyers.
Counter to the assumptions of many, rent collections have remained generally stable throughout the pandemic—consistently averaging between 95 percent and 96 percent since March 2020, according to RealPage.
After rents were frozen for two years, landlords are now playing catch-up. Despite sharp rental rate increases in many markets, residents are staying in their apartments longer. According to RealPage, apartment retention rates rose by 3.5 percentage points year-over-year in April to 57 percent. Notably, when renters renew their leases, they are also spending significantly more—10.7 percent more when compared to their previous lease. New renters, however, are paying even higher rates for the same units.
Demand for rental housing continues to outpace inventory in many areas. The 2022 Rental Housing Report from the Joint Center for Housing Studies (JCHS) of Harvard University reported the lowest rental vacancy rates since the mid-1980s.
In summary, there are many compelling reasons for why now is a particularly good time to invest in multifamily real estate. Historic demand across multiple generations, an anemic supply of new housing, demographic and lifestyle trends that favor renting, and economic advantages for both investors and renters will continue to provide tailwinds to the multifamily market. It is, quite frankly, a great time to be a landlord in whatever form or fashion that role can be held.
The Celebrity – Athlete’s Pathway; Why Professional Athletes Are Investing Heavily Into Real Estate
The careers of most athletes are short-lived. 3.5 years is typically the average number of years WNBA players have to play at a high level. To most athletes, each day isn’t just a chance to get better on the court, but also a day to prepare for what the future may hold.
Liberian-American basketball star Matee Ajavon went on to have an illustrious start to her career by winning the Gold Medal in the Pan-American Games in Rio De Janeiro, Brazil while attending Rutgers University. Her team, led by the famous Coach C. Vivian Stringer also went to the 2007 NCAA Championship Game vs. Tennessee University only to fall short of a win.
When the Houston Comets drafted Matee Ajavon as the fifth overall pick in the 2008 WNBA Draft, she instantly knew she had been given an opportunity that most athletes only dream of throughout their lifetime. Matee was 1 of the 144 women that could actually call themselves a WNBA pro.
Her career beat the odds by lasting for a total of 10 years. Matee played with the Houston Comets (1 year), Washington Mystics (5 years), and Atlanta Dream for the last 4 years of her career. She also played in 5 different countries that included Turkey, Brazil, Israel, Poland and Romania in the off-season. Going overseas allowed some WNBA players to earn up to 10x the salary they would in the WNBA.
In the latter stages of her career, Matee admits that she always felt the need to diversify and invest her earnings. Her search eventually led her to Real Estate Gurus; a company led by Real Estate professional Justin Giles. Giles introduced a then-retired Matee Ajavon to a whole new world by helping her build a real estate investment business.
Giles is a well-known real estate advisor and licensed real estate broker of 17+ years and has been behind the making of quite a few athlete-turned-real estate investors. He utilizes his social media platform on Instagram to educate and connect his many followers on ways to simply start investing in real estate.
His strategies, as explained in two of his books, Zero Down and Learn To Fish And Eat Forever, have also been widely received and critically acclaimed.
The number of former and current athletes investing in real estate has multiplied over time. Roger Staubach, Emmitt Smith, Magic Johnson, Shaquille O’Neal, David Robinson, Alex Rodriguez, & Martin Braithwaite immediately come to mind,
Professional athletes, especially in leagues like the NBA, WNBA, or the NFL, are traded quite often from team to team during their careers. This also means they have to purchase or rent properties from different parts of the country.
Athletes rarely have the chance to play for their home teams, which means they are likely to maintain at least two properties at any given time. One of them being their home state and the other being their current location.
While many A-list players may have people who put property deals together for them, most others have to get involved personally. In turn, this puts them squarely in the bustle of the industry. Whether knowing or unknowingly, many athletes end up as real estate investors or somewhat develop an idea or love for the industry.
Senegalese-born former Chicago Bulls star Luol Deng started a real estate symposium to educate players on the value of the sector. At the time he said, “I’ve always had a love for real estate and wanted to do something in Chicago for a long time,”
“We talk about players going broke, but we don’t talk about why that is happening,” Deng says. “The symposiums were a way to teach players about real estate and foster a better understanding of these kinds of investments.”
Few people consider the real estate market as having a low entrance bar because of the high prices quoted for properties. Not every athlete can afford to splash $36 million on a Beverly Hills mansion like LeBron. But according to Giles, they don’t have to;
“Athletes are often looking to invest their earnings and savings into the real estate industry. So they have to learn the art of finding the best deals from anywhere in the country. At every price point, there will always be an available and lucrative property somewhere and also loans available to help anyone acquire properties.”
“Even though some pro-athletes may be familiar with buying and selling properties, they still need to learn the small details of how to actually buy and sell properties as a ‘real business’. The first thing is learning how to find these deals that may not be in plain sight, next how to renovate these properties with the help of contractors, and last and definitely not least, how to turn it into healthy profits.”
The real estate market also offers many options for investment; while athletes like the NFL’s William Sweet buys and rent out their properties, others could choose to flip homes or buy and hold assets as part of their real estate portfolio.
“There are properties that are entering foreclosure, and I teach people how to stop a foreclosure even 24 hours before the auction.” Giles explains, “There are houses owned by deceased individuals who passed on without a will. Whenever that happens, there are ways to help their heirs claim these properties and then purchase the properties from them. If you know where to look, properties are always available using these strategies”
Robbie Fowler, an ex-Liverpool Football Club and England FC star who is now estimated to be worth roughly £30 million ($34 million) also opined, “Don’t get me wrong, not everything went into property at the time. And I didn’t just invest on my own, because when I was 18, I was on next to nothing and I couldn’t afford it, regardless of what people think about football players”.
“I invested with partners. It was all through the advice I was given, not because I knew anything or wanted to know it, it was totally by accident”.
He continued, “When you’re 18, I think it is probably the last thing on your mind. You’re obviously signing new contracts and you want to go out, you probably want a new car, and you’ll get all the things that you haven’t had”.
“But then all of a sudden, there comes a time when you think: Uh, I need to pull the reins in a little bit here and maybe look after my life after football. When I was 18, that was far from my mind, but over the years, it does materialise that way”.
Every investor’s dream is to have a portfolio that yields more passive income than active income. Athletes and celebrities often invest in stocks and bonds to get passive income, but the fluctuating markets have dissuaded many of them and made real estate investing a bit more attractive. This desire for passive income has led several pro athletes to invest in real estate investment trusts (REITs). While REITs are often considered safe, they are also more of a long-term strategy.
“After the housing crash of 2008, I found myself in so much debt. But somehow, I decided to stick with real estate, and over time I have devised investment strategies that make investing in real estate virtually recession-proof.” Giles believes that there is no such thing as a bad property market.
If the storied investment successes of NBA greats like Shaquille O’Neal and Magic Johnson are anything to go by, pro athletes will be investing in real estate for quite some time.
Inflation Ease A Positive Sign; Not Yet Trend. Implications For Commercial Real Estate
Check out this interview discussing that commercial real estate is facing a “liquid recession” and how higher interest rates impact valuations and trading. Also discussed is what factors could relieve the pressure in the CRE investment activity over the next several months.