There is one segment of this economy that is absolutely killing it. And interestingly enough, it is completely off almost everybody’s radar.
I’m talking about multifamily apartment units.
I first made the case for them back in February, when I completely restructured my portfolio away from the commodity plays that had made up my investments until then.
Since then, things have not gone sour in the least.
Rent rates have skyrocketed; I read that in Seattle and San Jose, for instance, they’re up 13% so far. On average, rents have risen at an annualized 4.8% so far this year. Localized “hot spots” make up most of the gains, which like Seattle or San Jose, can be double digits. These are mostly the major urban areas, like New York, or Austin. Rents have risen in the U.S. for seven straight quarters now.
Similarly, occupancy rates have been pushed up to stratospheric points, sometimes with as little as 3-4% of units standing vacant.
What we are starting to see is the beginning of a major recovery in the multifamily rental space. Talk of big development projects is being heard, and you could see a huge surge in construction of these complexes in as little as two quarters, when ground is broken in the spring of next year.
There are different dimensions to this; you could play the construction side who have billions in projects in the pipelines.
Management companies, which some properties owners employee to actually oversee their day to day operations, are also seeing steady and increasing demand.
Then there’re the actual community owners, who are the ones to see the direct benefit of higher rents/lower unoccupied units. But here you have to choose what angle you want to come at it from. Do you have a mixture of styles of apartments and aim for a nice “average rental business?” Or do you specialize?
You could go and try to corner the lower quality, as these are the cheapest cost and are probably experiencing the most intense benefit from the surge in occupancy and rates. Class C or Class B apartments are your target purchase. They might be older or just poorer quality, but because of that they also go for a premium, and new construction will be cheap and immediately gratifying.
Or you can go with the Class A apartments. These are very new, aimed at attracting high incomes, and typically have a big premium baked into their purchase. Or are just expensive to construct.
I’m taking the last route, with minimal exposure to the construction side also. AEC and CLP both aim at holding the cream of the crop either through acquisitions or construction. Acquisition has been the favorite lately, since construction is time consuming and properties are selling for record low prices.
The key to Class A apartments is to treat it like an investment in a new “renting class” of wealthy Americans. With the lower Class B and Class C investments, a sudden resurge in housing prices could easily coax new, middle class renters, back out of the market and into home ownership.
With Class A, I’m hoping that the more expensive costs associated with the units will be offset by occupants of Class A units deciding to make living in these apartment units a permanent lifestyle choice. I think that the allure of homeownership for the country’s elite has been at least temporarily obstructed; it’s much easier to live carefree in a luxury apartment where all costs are fixed and you’re surrounded by the finest of amenities and service personel, than to own a home and have to unclog your own shower drain of your wife’s hair. If it pays off, the next 20 or even 30 years could be one of the most lucrative periods for Class A units in general.
But whatever one chooses, the space is starting to heat up. Especially if we see a rush of development intended for sale (as opposed to construction being done by companies for their own operations) you could see some appreciation for apartment units to advance.
As of right now, the multifamily owners and operators have mostly been booking losses. But these losses are almost entirely related to the continuously diminishing prices associated with their properties. If the value of rental properties goes higher, these businesses will come to the attention of every fund manager in corporate America.
I’ve been building my own stake well in advance of that.
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Good post. Been on my radar, but I haven’t decided how to implement in the portfolio.
Hi Cain,
Agree on your picks, but waiting for a good entry as they seem to be weak with the markets. What’s your thought on oil? Is there a point you call uncle?
Of course, but it’s more economy related than price related.
I’d guess though that if crude really pushes through $110, I’d cover half waiting for the next re-entry. I’m hearing $110 being thrown around by one jackass or another.
The only way I’d totally exit is if some of the demand issues I’m seeing get resolved. Or I just get tired of the beating.
But I really do have expectations that crude returns below $80 inside of one year.
I could not agree more with this post. In a shitty economy no one can save enough for a down payment. Supply and demand. Not to mention the sudden realization by Americans that home prices can go down. Sadly, Canadians have not realized this fact yet. When they do I will be looking to buy a rental property(here in Canada). However, I will be holding that purchase off as our property market is in a much different situation then the US one.
You can always buy in the U.S. first, then transfer to Canada when the time is better.
There was no~doubt a rental spike in the burbs of De~Troy~it a few years ago.
most recently ,and by all means just an observation, a friend of mine who rents a home in B’Ham just had her rent lowered(by request)due to supply/demand.
Around Troy? I’m surprised since most of what I’ve seen has gone up. But then definitely all housing is local
Ive been doing alot of apartment shopping in Baltimore, MD and I thought Id put in my two cents and just look at this from another perspective.
Right now I see so much “froth” in this space that for a minute there I believed that we may be on the OTHER SIDE of the mountain for these kind of businesses, but now I am just confused. The resurgence in apartment living has recently been well documented, and the downturn in housing prices has been extreme. But here apartments are seemingly being snatched up with reckless abandon. I am actually seeing speculators come back in (especially in Baltimore City) and buy cheap rowhouses, renovate them (not very well), and put them up FOR RENT. I am also noticing that management companies are increasingly being hired to manage these properties. And like you wrote in your post, the apartments that are going the fastest are in the above-average to expensive range.
So hearing this you might say “OK, thats what I just said!” But isnt this how bubbles are made and popped? Something in me is just saying THIS IS THE TOP. With everyone saying things like “NOBODY wants to buy… why take the hassle?” maybe this IS the turn and the housing market might start coming back? I rented an appt for a year, but at the end of the lease I am planning on buying a place and taking advantage of sub-4% 30 year rates.
Am I thinking too hard here ? If I was going to invest in this thesis, what are some companies you recommend in the management and Class A space besides ones you’ve mentioned? And why do you like CLP? They seem to be mostly invested in properties in the Sun Belt. Is that where you think the business will boom?
Anyways thanks for the hard work and honesty. Its always nice to know that even the pros dont get EVERY trade right. Good luck
not sure about Troy?
Birmingham(talking rental homes not apartment)
Burbs of DE~TROY~IT(D.Cherry accent)
sorry for the confusion.