Investing in Multifamily Real Estate
Why Invest in Multifamily Real Estate
Not long ago, multifamily was conventionally evaluated alongside single-family residential. More than ever, though, multifamily is now firmly entrenched as one of the four major commercial real estate subasset classes — along with retail, industrial and office. As of Q1 2017, multifamily accounts for around one quarter of all U.S. commercial real estate investment, and is getting more and more love from institutional investors. In this article we take a look why savvy investors allocate meaningful portfolio share to multifamily commercial real estate, and why current macro conditions favor the asset class.
A Built-in hedge against inflation. Reduced risk
Retail, industrial, and office properties typically have just a small group of tenants locked into long-term leases (and sometimes just one). Multifamily properties, on the other hand, can have tens or even hundreds of diversely-structured rental agreements, with tenants turning over on a rolling basis. This is the basis for programmatic value-engineering of NOI (net operating income). Multifamily investors who engage in active management enjoy downside-protection by minimizing vacancy exposure during economic downturns. On the flip side, consistent turnover of leases in a multifamily property allows management to gradually increase average rents in accordance with prevailing market rates and commensurate with rates of inflation.