In today’s dynamic and ever-expanding investment landscape, there is no shortage of investment opportunities for investors to choose from. However, when considering the risk-return tradeoff, real estate continues to be an excellent choice for investors looking for higher returns at reasonable levels of risk. Of the many sectors within real estate to consider investment, multifamily developments stand out due to their consistent income, increasing demand, and the potential for asset appreciation.
In addition to this, increasing demand for premium multi-family apartments is being driven, in part, by lifestyle preferences, as well as economic and demographic changes. This article will go into why multifamily developments are an excellent choice for investors and will include noteworthy statistics and essential multi-family development investment metrics.
What are Multi-Family Apartment Developments?
Multi-family apartment developments are larger residential rental apartments that typically house more than four rental units in one building or complex. These multi-family apartments can range in size from two individual residences to hundreds. Depending on the number of rental units within a building, a management company typically manages the day-to-day tasks of operating the facility and reports to the property owner(s).
Important Multi-Family Development Stats
Every individual or institutional investor will have their own investment criteria, investment goals, and risk profile. With that in mind, below are high-level statistics and information intended to give a better sense of the risks, returns, and potential for growth for multi-family development investment.
In 2021, the multi-family real estate investment market surpassed the office market, accounting for 42% of the total U.S. market in 2021.
In many parts of the United States, the demand for multi-family housing is softening (this was expected after a few years of increasing expansion). In South Carolina, however, the demand for multi-family housing remains high. A recent article from the Charleston Regional Business Journal stated, “With an overall national housing shortage and a strong trend of people relocating from large, expensive metro areas to smaller, more affordable metros — especially Sun Belt markets such as South Carolina.”
The one-year ROI on multi-family housing sits at 7.6% compared to single-family housing's 1.32%.
A large part of the demand growth in multi-family developments can be attributed to demographic changes. A few noteworthy demographics have played a particularly big role in this growth: young professionals (Gen Z and Millenials), retirees, and empty nesters.
When considering the cost of renting vs. owning, it's no surprise that young professionals, retirees, and empty nesters are choosing in ever-increasing numbers to live in multi-family rental properties.
In an article we published earlier in 2023, we discuss how the gap between the cost of home ownership and the cost of renting has grown significantly in recent years: "From Q4 of 2021 to Q3 of 2022, the average monthly cost of ownership rose from $2,181 to $3,363 - an incredible 54% increase. In comparison, from Q4 of 2021 to Q3 of 2022, the average monthly rent cost rose from $1,980 to $2,142 - an 8.2% increase."
While cost is a major deciding factor when choosing an apartment over owning, there are other important decision factors these demographics are taking into consideration that we outline below.
We've seen a trend among young professionals choosing to rent rather than purchase a home. Many of these young professionals prefer the flexibility and convenience of renting over owning their own homes.
The traditional concept of ‘home’ has evolved in the era of digital nomads, the gig economy, and remote work. Young professionals prioritize renting apartments close to work, with access to public transportation, availability of amenities, and social opportunities over the responsibilities that come with home ownership.
Retirees and Empty Nesters
As people retire or become empty nesters (or both), they often look to downsize their homes but still want to stay in the same area. Premium multi-family apartments provide this demographic with luxury living options with desired amenities without breaking the bank. Multi-family apartments also don’t typically require the same level of maintenance or upkeep as single-family homes, which can be a bonus for those retirees and empty nesters looking to downsize.
Important Multi-Family Development Metrics
Next, we'll look at five important multi-family development metrics or (key performance indicators) to measure and track the performance of a multi-family investment over time:
1. Occupancy Rates
2. Net Operating Income (NOI)
3. Debt Coverage Ratio (DCR)
4. Cash on Cash Return (COCR)
5. Gross Rent Multiplier (GRM)
Occupancy rates tell you how many units in a multi-family apartment are rented. Keeping an eye on this metric will tell you if your complex is running at full capacity or not. If it isn’t, this metric is a flag that internal or external factors affect the occupancy of the building.
As mentioned in the earlier list of statistics, Charleston's multi-family occupancy rate is about 93%. This sits close to the national average occupancy rate, which was 93.6%.
Net Operating Income (NOI)
To calculate NOI, you subtract all operating expenses from the gross income your property generates. This metric helps you determine how much profit you're making from the multi-family development, and it also tells you whether or not it's performing to expectations.
Debt Coverage Ratio (DCR)
Your DCR measures how much net operating income is being generated in relation to the total debt service payments. It's wise to keep an eye on this metric — it helps determine if the development is generating adequate cash to service its outstanding debt.
Cash on Cash Return (COCR)
Your COCR is the ratio of net operating income to total cash invested in a project. It measures the return rate of your capital investment and helps you determine your development's profitability.
Gross Rent Multiplier (GRM)
The GRM compares the sale price of a multi-family property to its annual gross rental income. It signals whether you are paying too much for the property based on its rental income potential. A higher GRM often indicates investors paid more than a property's market value.
These five metrics have become the standard for measuring and tracking the performance of multi-family apartment developments. Keeping a watchful eye on which metrics help multi-family developers, operators, and investors determine the ongoing performance of multi-family apartment investments.
It’s clear from this article that demographic shifts and preference changes, primarily driven by young professionals, retirees, and empty nesters, are driving ever-increasing demand for premium multi-family apartments. This demand has created excellent multi-family development opportunities for developers and investors, particularly in the US Sun Belt. This is why I continue to be bullish on premium multi-family developments.