Why Demand for Multifamily Construction is on the Rise Nationwide

April 11, 2022

By: John Tomblin, Senior Solutions Architect
Scottsdale Bizz, a division of Sofvue, LLC
Printed with permission of Sofvue, LLC and the author

The multifamily construction market has quickly rebounded from the global pandemic, with investors attracted to its exponential rental growth, rapid absorption, and strong migration trends. As a result, real estate investors see cap rates in multifamily construction as a safe harbor where they can invest, and in a market where inflation abounds, real estate, at least in some markets, is the right hedge at the right time. According to Fannie Mae, multifamily demand was estimated to be 673,478 units in 2021, compared to 296,520 units in 2020. Couple this with the fact that new housing starts are down nearly 75% from starts a decade ago. With demand high, new construction of residential homes down and hyperinflation preventing new construction starts, you have the perfect storm. Put all these pieces together and you begin to understand why the demand for multifamily development is like nothing in prior history.  

Let’s take a look at what’s driving this demand.

1. Ease of Financing

In terms of unit development costs, the cost of building a single-family home is always higher than a multifamily unit. That said, when it comes to single-family residential developments versus multi-family, multi-family financing is typically superior and more likely to receive development funding due to its lower risk and lower “per square foot” construction costs compared to single family dwellings. Additionally, given today’s (2022) hyperinflation, along with rising interest rates, developers and banks are looking for ways to provide housing solutions with a lower initial investment and lower financing thresholds than traditional single-family developments, another trend you can expect to see increase over the coming decade. Case in point, in 1990, a study by the Pew Research Center in 2017 the percentage of “renters” in 2016 was 36.6%, the highest rate ever recorded. In 2021, that has remained steady, but according to another study, also by the Pew Research Center, the number of young people renting vs owning (under 35) has been steadily increasing and today sits at a high of 65.9%.

2. Consistent Cash Flow

A key benefit of multi-family development is, of course, the cash-flow it produces. With today’s costs PSF, multi-family unit development costs, although high, still produce effective yields. As an example, according to an article in ProEst, a three story, twelve unit apartment building, with masonry construction would have a price tag of approximately $9.4 million. If each of these units are then rented for $2,000 per month, that’s $24,000 in GOI per month, BTCF. However, you still have to develop a cap rate estimate as part of your investment strategy to maximize ROI.

Hot markets today (2022), include cities like Tampa Bay, San Antonio, Charlotte, Phoenix and Las Vegas. Notice that no cities from California made the list.  Why?  Because currently, even though rental income in California markets are the highest in the nation, the costs of new development are also the highest, making business friendly states like Arizona, Nevada, Texas and Florida hotbeds for development, a trend you won’t see slowing down anytime soon.

3. Inflationary Hedge

Historically, real estate has generated better results than other investments (stocks, bonds, etc.). It’s more stable, has longer life cycles and always keeps pace with inflation. While some stocks still outperform multifamily real estate income and caps, the stock market is still a volatile market, filled with uncertainty (dare I remind everyone of the 2000 tech bubble burst and the 2009 stock market debacle).

However, in most areas, rents typically keep pace with inflation, and even with today’s inflationary rates (anywhere from 8% to 15%), and because most leases are 6-12 months, landlords are able to raise rents to keep pace, and in hot markets like Phoenix and Tampa Bay, renters have little choice, due to the high costs of single-family homes, but to sign another one year lease at a much higher rate.

4. Tax Benefits

Another benefit of building and owning multi-family developments is the attractive tax benefits you can take advantage of. Although there are numerous factors associated with multi-family financing, how many units you can own and still be eligible for federal loan programs, developers who are able to build larger developments truly capitalize on the tax advantages, not only with some maintenance and operation costs, such as utilities, property management fees, repair expenses and insurance fees, but also taking advantage of depreciation schedules, from 39-year straight-line depreciation for commercial property developments or the 27.5-year straight line depreciation schedule for residential property based on current IRS tax code. Another option is taking advantage of accelerated depreciation schedules, typically done by completing a cost segregation study. Consult with your CPA and lender to learn more about these options.

Property Management for Multifamily Properties

The more units you own, the more challenging property management becomes. When you own a single duplex or fourplex, and you are in the same city, managing the units, although still time consuming, is manageable. However, when you expand beyond the four or five property mark, the situation changes, and quickly. Dealing with lease expirations, unit upkeep, broken hot-water heaters and other maintenance needs, and renovations on move-out, evictions, along with communicating with tenants, taking care of prospect qualifying, lease negotiations, defaults and a hundred other issues, will produce significant operational overhead, time and costs.

One solution to tackle these challenges is to develop a custom mobile app that automates much of the management process for your properties, especially when you have 10, 20 or 200 units. Having a custom property management mobile app can be set-up to automatically collect rents, communicate with tenants, and address maintenance requests with a single tap.

Do you already own multifamily properties? Ready to improve the way you manage them? Are you in Scottsdale, Arizona and looking for a solution? We can help. Call Scottsdale Bizz at 623-845-2747 and let’s start a conversation.

Article References:

Link: https://multifamily.fanniemae.com/news-insights/multifamily-market-commentary/2022-multifamily-market-outlook-defying-gravity
Link: https://proest.com/construction/cost-estimates/apartment-complexes/
Link: https://www.pewresearch.org/fact-tank/2017/07/19/more-u-s-households-are-renting-than-at-any-point-in-50-years/
Link: https://www.pewresearch.org/fact-tank/2021/08/02/as-national-eviction-ban-expires-a-look-at-who-rents-and-who-owns-in-the-u-s/

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