Inflation and Multifamily Real Estate
Inflation is something we’ve all grown familiar with in the last few months, and now with a ban on buying oil from Russia, it will likely get worse. What does this actually mean though? What does it mean for multifamily Real Estate.
The “Best Ever Conference” covered this and some key takeaway are:
- Some inflation can be good, but hyperinflation can cause an economic slow down – but real estate, especially multifamily real estate, has weathered previous recessions really well.
- With the fluctuations in the stock market and geopolitical risks, private and institutional capital is rapidly flowing into commercial real estate, which is causing cap rates to continue to compress and pricing continuing to rise
- Being in economically diverse markets, where population growth is steady, are typically the least risky markets
Inflation is generally defined as a rise in the price of goods and services. The Fed tries to stabilize the inflation rate at about 2% annually by balancing the federal fund rate and employment levels. Rising inflation can signal a few things, one is an expanding economy, however, it also can result from the supply of money increasing faster than economic output. As a result of the pandemic, the consumer price index rose nearly 8%.
Whatever the cause is, it makes the dollar worth less. As a result, investors direct their funds into hard assets, like Multifamily Real Estate.
Multifamily Real Estate and Inflation
In December the Fed indicated that it would raise the federal funds rate to 1% by the end of ‘22 and to about 2% by the end of ‘24. For RE investors higher interest rates and inflation requires us to take a closer look.
While it does appear that higher interest rates is a negative, multifamily performs well in an inflationary period. The economic growth (which I am experiencing every day in my Recruiting business) fuels higher wages and demand for housing. I can also tell you first hand that markets like Austin are incredibly hot and home prices are absurd. The demand and shortage of homes nationwide creates more demand for apartments. Rents rise with home prices and since multifamily mortgages have fixed interest rates and loans, debt service payments remain stable.
Investing in Multifamily Real Estate Now
In summary, multifamily investing is still a great option, maybe one of the best given the market conditions. However, competition is fierce and it really comes down to the operator you are working with. Now it is just as important to vet the operator and their team with as much rigor as you vet the deal they are presenting. We focus on primary and secondary markets that check, the following boxes, at a minimum:
- Steady population growth
- Job growth
- Diverse employment industries
- Low unemployment
With population migration trends increasing in the Southeast, we have seen success finding deals in Jacksonville, FL and will continue to search within this market because we can benefit from the factors above, but also economies of scale, which allows us to be conservative in our underwriting, while still being competitive and winning deals.