Finding Opportunity in Today’s CRE Market

With cranes up in all major cities, an abundance of luxury apartments have come online in recent years.  Though new construction financing has become more stringent in recent months, luxury apartments continue to be built.  According to Yardi Matrix, 75% of all new apartment complexes built in 2015 are high-end with that trend continuing into 2016.  Developers are moving into the luxury market to maximize income, making the high constructions costs more feasible.

Rental trends continue to favor investors, but what does this new supply of housing do to the multi-family market? 

When new apartment units are being constructed in a market increasing the supply, that is an indicator the market has reached maturity.  Many primary markets across the nation have reached this point.  Between primary markets reaching maturity and foreign investors pouring money into stable Class A assets in primary US real estate markets due to instability in foreign economies and volatile financial markets, values for Class A assets (or luxury apartments) in primary markets are inflating while supply is increasing, leaving little to no opportunity in this asset class.

Few opportunities in the high-end market does NOT mean there are no opportunities left for multi-family investors though.  On the contrary, now is a great time to look at smaller unit size, lower income, Class-C properties in secondary cities.  With new construction of low to middle-income housing not feasible due to high construction costs, the housing stock in this asset class has stayed relatively stagnant.  Between the demographic shift towards the rental market and new homeowner financing remaining stringent, the demand for Class C housing continues to grow. There are several reasons.  Minimal new units are coming online, combined with increasing demand, and this is leading to the unprecedented rental growth we are witnessing.  With most institutional and foreign investors overlooking lesser class assets in secondary markets, savvy investors can find tremendous value in this market by taking advantage of rental growth without competing against inflated asset values.

Despite the new stock of luxury apartments coming online, these lower tier units continue to have high demand, and rents continue to climb across these asset classes.  Premium luxury rents are pushing traditional renters elsewhere leading to the gentrification of traditionally low-income communities and working class secondary cities.  Local to us here in New England we’ve seen communities that have been popularized in Hollywood films as high-crime areas (e.g. Charlestown, MA and South Boston) become havens for young-professionals.  Even secondary cities further from a MSA’s economic driver, such as Stamford, CT and Mill Cities throughout New England, are taking advantage of the influx of people fleeing primary cities for cheaper rent and creating live-work-play environments of their own.

While there is no denying the perceived value of a luxury apartment complex in a primary market, identifying Class C assets in certain secondary cities is where value is in today’s multi-family market.