Why would an economic environment with inflation hovering at 40-year highs, an uncertain job market, rising interest rates, impending recession, and geopolitical conflict be prime conditions for investing in multifamily?
Multifamily is a direct beneficiary of inflation. That’s because of the rising interest rates the Fed has had to unleash to combat inflation. This includes 75-basis point rate hikes in both June and July – the June increase being the highest since 1994. As a result, mortgage rates have jumped from 3.2% to 5.7% in the first half of 2022. Rising rates and other factors have impacted home affordability – making multifamily the default housing option.
The combination of rising rates, declining purchasing power, and low inventory of for-sale housing is pricing many would-be homebuyers out of the housing market. White Oak Partners Research Team, How a Rising Mortgage Rate Environment Affects Multifamily Demand (August 2022) whiteoakpartners.com.
The effect is that current renters will remain renters for longer, and those entering the housing market will have multifamily as their primary option.
The past year has demonstrated why multifamily is the ideal inflation hedge. Staggered lease expirations allow apartment owners/operators to increase rents to keep pace with inflation and to offset rising operational costs with negligible impact on occupancy. Relatively short-term lease terms (typically 6-12 months) allow multifamily operators to react to inflationary pressures quickly and efficiently.
Multifamily has demonstrated its resilience and ability to outperform in a turbulent market, as the COVID-19 pandemic showcased. The strength of the rental market since the end of 2020 has been remarkable but not surprising to savvy investors who have long relied on multifamily as inflation and recession hedge.
Remarkably, more markets have seen higher rent growth in the past 18 months compared with the five years leading up to the pandemic.
Since January 2021, every market experienced rent growth of at least 10%, while roughly two-thirds of markets saw rent growth of 20% or more. Even lagging markets saw rent growth of over 10% over the past 18 months. Besides industrial, which benefited from pandemic-fueled stay-at-home shopping, multifamily outperformed every commercial real estate segment. Steve Guggenmos, 2022 Midyear Multifamily Outlook (August 2, 2022), freddiemac.com.
Concerned about income reduction due to job loss or job reduction?
Concerned about the eroding buying power of your wages?
Looking for an inflation hedge?
Multifamily is the ideal inflation hedge, and as the economic fundamentals demonstrate, prime conditions exist for investing in this segment.
Again, why is multifamily the ideal inflation hedge?
As food, gasoline, and clothing prices rise, so do housing prices – especially multifamily. As inflation squeezes buying power and recession and unemployment weigh on income, people will downsize to save money. That’s why multifamily is poised to reassure investors worried about diminished buying power and reduced income.
Savvy investors have long relied on multifamily for its hedging qualities, non-correlation to the stock market, and the peace of mind from being insulated from general market volatility.
Reliable and consistent rents independent of the stock market and worries about economic indicators neutralize concerns about job loss and reduction, where the passive income streams from multifamily can compensate for any income reductions. And with relatively short-term leases, multifamily housing can keep pace with inflation step by step as owners can increase rents frequently and periodically with little effect on demand.
Besides the inflation hedging and income-compensating benefits of multifamily cash flow, the underlying values of these assets also ensure uninterrupted wealth accumulation.
Consider multifamily assets if you’re looking for an asset with inflation-hedging qualities with income-insuring capabilities. Why wait? Prime conditions exist right now to invest in and profit from multifamily.