By Jeffrey Wilson, President, The Jeff Wilson Group LLC (Multi-family Investments)
In the years since the financial crisis, multi-family properties (apartments) have become the product of choice among commercial real estate investors. On a national basis, the next best is type is industrial followed by office, and finally retail is still a four-letter-word to most investors. The reasons multi-family is leading are pretty simple: 1) Available financing, and 2) Renter demand.
Available financing means that investors can still buy and sell properties. That financing is available only because lenders know that multi-family fundamentals are good. When a business goes under, it just disappears. When a person loses their home, they still have to live somewhere.
National trends do not tell the whole story. At any given time there can be emerging real estate markets in certain cities despite what is happening in the rest of the country. As investors, we want to seek out those emerging markets and put our money there.
The two critical multi-family market indicators are: 1) Employment growth, and 2) Overbuilding. Employment growth drives multi-family appreciation. After a period of falling property values, employment growth will drive a market to the emerging phase once again. New jobs cause the once vacant inventory to become occupied which causes rents to rise. Once this emerging phase starts, properties begin to appreciate, and construction eventually begins again.
On the other hand, overbuilding kills the multi-family market. After a period of strong employment growth and responsible construction, speculation rears its ugly head and causes overbuilding in a city. Overbuilding combined with job losses will cause the market to stall, and properties will lose value until the next emerging phase begins years later.
How is the multi-family market in our own backyard?
Marcus and Millichap’s 3rd Quarter Apartment Research Market Update projects DFW’s 2011 payrolls to grow by 78,000. When combined with 2010’s growth of 56,000 jobs, the metro will reclaim nearly all of the jobs lost through the downturn by year end. Texas job growth, and in particular DFW job growth is strong by any standards, and we are doing amazingly well compared to the rest of the country.
The report also said DFW multi-family construction completions will be a measly 3000 units, the lightest year for new construction since the early 1990’s. The construction pipeline is growing, but tougher lending standards and cautious investing are keeping new construction in check.
We have an excellent opportunity right in our own backyard because employment growth is strong, and the next construction cycle has not yet begun. Even more convincing is that average DFW rents have risen about 9 percent since the end of 2009, and rents are forecast to increase 4.4 percent during the next year. So, despite all the real estate negativity we have heard in recent years, DFW multi-family is a great investment.
he NDCC Blog, "The Voice of the Chamber," will inform our membership about a topic that is of interest to the North Dallas business community and encourage a dialogue among the readers. NDCC members will participate as guest bloggers, who will be asked to contribute a 200 – 300 word blog entry once a month on a specific topic, which will be determined by the chamber. The NDCC will select and edit submitted entries as necessary. Not all blog submissions will be posted to the blog. Guest bloggers will be identified, and if desired, contact information will also be posted.
If you are an NDCC member who would like to contribute as a guest blogger, please contact Lizeth Winkles.
