Investing in real estate during an inflationary environment can be a real challenge for many investors. With rising interest rates, falling returns, and concerns about recession eroding potential returns, it might seem wise to leave funds unused. However, real estate is a multifaceted type of investment with several advantages that go beyond pure ROI. When done correctly, real estate can be a reliable source of income to ensure financial stability through uncertain times. As economic conditions shift rapidly, having the means to generate substantial cash flow is critical and real estate remains one of the few classes of investments that can offer this security. Therefore, even though commercial real estate investing may seem particularly daunting in an inflationary environment, done right it could end up being one of the most sound investments you make all year.
Multifamily Real Estate
Investing in multifamily real estate is a great way to capitalize on the flux caused by a recession. Not only have lenders and investment partners stepped back, but new housing supplies and construction have been delayed, resulting in a decrease in both rental and for-sale housing. This has resulted in an increase in demand, with more renters facing exorbitant home costs in addition to higher interest rates. This encourages them to forego homeownership altogether and join the rental market instead. Furthermore, since renters are less likely to relocate during economic downturns, apartment occupancy typically remains firm even during a recessionary period.
Real estate investors with an eye for apartments may have something to celebrate no matter the rate environment. Apartments have historically benefitted from lower financing rates, due to the federal backing of multifamily mortgages from Fannie Mae and Freddie Mac. This means that real estate investors can expect lower interest rates than other types of commercial real estate tend to attract. According to Real Capital Analytics, these historically lower financing rates can amount to an average difference of 48 basis points over 10 years. On top of that, apartment investors can even benefit in a rising inflation climate; as real estate becomes more expensive to buy and new products more expensive to build, existing inventories of apartments become attractive alternatives for people looking for stable real estate investments.
The real estate market has seen a shift in the past few years, with homeownership rates well below those of the last recession. This can be attributed to the large population belonging to millennial and Gen Z age groups, who are increasingly favoring renting as a lifestyle choice: Millennials for their career aspirations and Gen Z for more financial freedom. What’s more, not only are these younger generations looking for apartments but baby boomers too, who tend to downsize or look for new real estate locations. As such, rental housing will remain an attractive option in years to come.
High Demand Limited Supply
Despite multifamily housing starts increasing, the demand for rental units across the United States is still far greater than what is currently being provided by multifamily dwellings. According to the National Multifamily Housing Council and the National Apartment Association, the current supply of multifamily housing does not meet the demand by 600,000 units. This makes it increasingly more difficult for people looking for a place to rent at an affordable cost since multifamily housing may be their only option due to factors such as limited space and budget constraints.
In recent years, apartments have been increasingly concentrated in downtown or central business district (CBD) areas of the major gateway markets. These apartments are classified as “renter by choice” as they offer prime location and amenities for young workers flying solo. However, with millennials making the move to start families, there is a shift away from these apartments – bringing an opportunity to investors in suburban apartments. Suburban apartments offer advantageous initial acquisition yields while their rent and occupancy performance outperforms downtown areas. Investors should seize this golden opportunity before it disappears!
Over the past decade, multifamily real estate has been one of the strongest investment types in any asset class. Demand for multifamily rentals is historically high, largely due to an underfunded supply of housing coupled with demographic and lifestyle trends that are currently favoring renting over ownership. The combination of these forces has created structural advantages for multifamily investors which have caused returns to remain consistently high – a great place to be as a landlord right now. Additionally, multifamily investments provide a unique opportunity to add immense value for both investors and renters; with appealing amenities and features greatly increasing satisfaction without breaking the bank. All taken together makes now a great time to get involved in multifamily real estate investments; both from an economic point of view from an ethical one.