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Multifamily real estate <\/strong>has been on a tear for the past two years. This is not only thanks to 2020-induced rent growth<\/strong><\/a> and price appreciation<\/strong> but also due to simple supply and demand. As millennials, a rent-rather-than-own generation, enter into peak homebuying age, many still choose to rent\u2014instead of buy. This presents a unique opportunity for real estate investors<\/strong>, as multifamily demand skyrockets while inventory can barely keep pace.<\/p>\n But rising interest rates<\/strong><\/a> are starting to make the housing market look shaky. Is there still a strong demand for multifamily, and if so, how will prices change if financing becomes more expensive while building faces a bottleneck<\/strong>? We\u2019ve brought on Caitlin Sugrue Walter<\/strong>, Vice President of Research at the National Multifamily Housing Council, to give her take on the multifamily investing<\/a> situation.<\/p>\n Caitlin knows the apartment investing numbers, arguably better than anyone else, and sees some movement on the horizon. She diagnoses exactly what has led to such high demand for apartment rentals<\/strong>, why builders got stuck in developing quicksand, and whether or not rent prices are still poised to increase<\/strong> as we close out 2022. She also hints at the best markets for multifamily investment<\/strong> in the nation and what investors can expect to happen to prices as cap rates begin rising and new interest rates take their toll.<\/p>\n Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave: Caitlin: Dave:
Hey everyone. I\u2019m Dave Meyer. Welcome to On The Market. Today, we have the Vice President of Research at the National Multifamily Housing Council, Caitlin Walter, joining us for a really, really informative interview. You\u2019re definitely going to want to stick around for this if you\u2019re interested in the multi-family space.
In large part due to bigger pockets, I think demand among investors for multi-family apartments, either as a sponsor, like you\u2019re going out and buying the deals or as a passive investor, which is something I do pretty regularly, has exploded. And it\u2019s because multi-family, over the last couple of years, has presented some of the best returns in the entire, not just in the housing and real estate industry, but across pretty much every investment class. Multi-family units has been very attractive and it\u2019s why people want to get into it.
But the question, of course, remains just because it\u2019s done well in the last couple years does not mean it\u2019s going to do well in the future. So we wanted to bring on Caitlin Walter to help us understand the state of the multi-family housing market as it sits today, but also what is going to happen in the future? Is the crazy rent growth that we\u2019ve seen going to continue? Are cap rates, which are the way that multi-family properties are valued, are they going to go up or down and change the valuations of apartment buildings? Is demand going to increase even though we\u2019re seeing building at a much higher level than we have over the last couple of years?
These are questions I\u2019ve personally had for a really long time, and I think you\u2019re really going to like this interview if you have similar questions to me, because Caitlin does an excellent job explaining it. With that, let\u2019s bring on Caitlin Walter, the Vice President of Research at the National Multifamily Housing Council. Caitlin Walter, welcome to On The Market. Thank you so much for being here.<\/p>\n
Thanks for having me.<\/p>\n
You currently work as the Vice President of Research at the National Multifamily Housing Council. Can you tell us a little bit about what that organization does and what you do there on a day-to-day basis?<\/p>\n
So the National Multifamily Housing Council is the trade organization that represents owners, managers, developers, as well as industry suppliers, so cable companies, things like that to the apartment industry. It\u2019s typically the leadership of those organizations, although we do have a lot of opportunities for folks that are on the lower levels of those organizations as well. We provide research. We provide government affairs, outreach on behalf of our members, also a lot of industry best practices that we work on. And our owners, the companies can range from a couple of folks to thousands of employees, so it really runs the gamut. And at NMHC, I work in the research department, so we provide both in-house research as well as we do contract out some academic and consultant research to look at the multi-family industry, so typically rental units in buildings with five units or more.<\/p>\n
Well, you are the perfect person to be here right now, because so much of the data we look at is really mostly talking about single-family residences or small multi-family. That is, at least in my experience, the most readily available information about the housing market. And it is so great to find an organization like yours that provides really high quality, free for the most part if I understand, research that people can understand this market. I\u2019d love to just start with a high level, overarching question. What is going on in the multi-family housing market, right now in August of 2022?<\/p>\n
So in August of 2022, and I should qualify, it\u2019s the end of August, 2022, because it seems to change by the week.<\/p>\n
That\u2019s true. It\u2019s by the day. You have to say exactly what day we\u2019re recording.<\/p>\n
We just released some research last week. We are fortunate. We have a lot of great data providers that provide free data for us to give to our members. Looking mainly at the professionally managed apartment universe, we still saw in the second quarter really high rent growth. We saw double-digit rent growth in most places. The highest places are in Florida it appears.
But people are getting nervous about the state of the overall economy, namely interest rates rising. We\u2019ve seen a lot of costs going up over the pandemic and even before the pandemic, so insurance costs are going up, property taxes are going up. So while we are seeing those rent increases, we\u2019re also seeing operations costs going up, too. And if you have interest rates increase, then that\u2019s another cost item you\u2019re going to have to absorb. So, folks are still optimistic about the fundamentals of the multi-family industry overall in terms of demand, but I think that some of the stuff going on in the economy is giving folks a little bit of a pause. But I\u2019m hopeful that because the demand is so strong that we should be fine.<\/p>\n
You did some fascinating research, and I\u2019d love to talk about this before\u2026 We\u2019ll get back to the what\u2019s going on in today\u2019s market. But you brought up such a good point that demand is extremely strong and that\u2019s led to a lot of confidence in this industry. You just conducted a really fascinating study about long-term demand trends for the multi-family industry. Can you tell us a little bit about that?<\/p>\n
Sure. So we worked with one of our partner organizations, the National Apartment association, to hire consultants Hoyt Advisors, who have worked for us in the past, to look at demand for apartments going through 2035. And it found that nationally, we\u2019ll need to build 4.3 million new units by 2035 to keep up with demand. And of that 4.3 million units, we actually need about 600,000 of those units now to ease the affordability crisis.
The bulk of that demand is going to be located in the South, namely in Texas. It shouldn\u2019t be surprising to folks. You look at the news stories where people are moving, a lot of it is in the Southeast. And that demand estimate is actually kind of on the conservative side because they took into account the fact that immigration largely hasn\u2019t been occurring in the past couple years to a variety of factors. So if we get immigration ramping up again, then that demand number could go even higher.<\/p>\n
And so, you\u2019re talking about international immigration, right?<\/p>\n
Yes. Yeah.<\/p>\n
That\u2019s really interesting. So even with a relatively conservative immigration number, you\u2019re saying that we need 4.3 million more multi-family units over the next, what was that, 12 or 13 years, and then 600,000 is needed right now. Can you provide some context? Is 600,000 a lot? Is that achievable in the next couple years? Or is that something that the construction industry is going to struggle with?<\/p>\n
So it is a lot. It is doable, but there are a lot of headwinds. So taking a step back, when the housing crisis happened in 2007 and 2008, that coincided with the Millennials coming online, which traditionally the highest age cohort that rents are young adults. So we had this generation that was the biggest since the baby boomers, that all need to rent apartments. And because folks were concerned about building because of what was going on with single-family, it also bled over to multi-family, so we couldn\u2019t build. So we had all these years where we needed to be building 300, 325,000 units, and we were only building 100,000. So that, yeah.<\/p>\n
Whoa.<\/p>\n
I think that was the lowest we built. Then we had every year you don\u2019t meet that demand, it just kind of adds to what you need to build. Our completions for the past few years have been about where we needed to be demand-wise on an annual basis, but we\u2019ve still got that backlog of that 600,000 units. And so, obviously, rent growth is good, but we need those units at a variety of price points, not just the high end. And because we have this backlog, we actually, in a normal functioning multi-family market, what you would have is you\u2019d have the Class A stuff come on that\u2019s brand new, so then the older class A would move down to Class B. Rents would get more affordable to more people. But because we had this backlog, we actually had reverse filtering happen, so the Class B was Class A rents, basically. Those who would be paying Class A rents typically, they had to pay Class B and so on, so that\u2019s why stuff has gotten more expensive.
So we have that problem going on. We can also only really build to the high end right now, because land is expensive, materials are expensive if you can even get them. The prices have been going up. It\u2019s also just really hard to build period because of NIMBY, or \u201cnot in my backyard\u201d opposition. Unfortunately, a lot of folks have these preconceived notions about what\u2019s going to happen if you get multi-family in your neighborhood, which isn\u2019t true. And so, it\u2019s hard to actually get stuff out of the ground because you usually have to get your land rezoned to build multifamily. And so, if the NIMBYs are against it, then it\u2019s hard to get the rezoning. So all of those things make it more difficult to actually build new units. So in theory, we could build that 600,000, but there\u2019s a lot of reasons why that may not be happening right now.<\/p>\n
That\u2019s extremely helpful context. And I want to get back to the affordability point in just a minute, but just to summarize, if I understand correctly, you\u2019re saying that right now, we\u2019re actually at a decent pace. But because between the Great Recession and recent period, it was so slow, we\u2019d have to basically go above what is a normal level and we\u2019re not seeing that yet. And so, this backlog of 600,000 apartments, multi-family units, has persisted.
When you look at construction data, at least on the single-family market, which is what I\u2019m a little bit more familiar with in terms of the data, you do see that construction is starting to slow down a little bit. And that\u2019s largely because of interest rates and people fear that will lower demand, and labor and material costs are going up very consistently. Are you seeing similar trends in the multi-family market? And is there concern that construction in multi-family actually might go down?<\/p>\n
So there\u2019s definitely concern about it. Single-family building tends to be the first to stop when you see interest rates go up. Multi-family building is typically a longer process. It\u2019s even longer now than it has been traditionally. We\u2019re looking at two year plus timelines to get a project built. So because of that, when multi-family developers are looking at the time horizon, they\u2019re kind of already building in more economic uncertainty because it is a longer time horizon. But that being said, it is impacting things, the interest rates. Folks are having to get deals repriced. When you have to get a construction loan, obviously, you have a higher interest rate. It\u2019s definitely having an impact, but not a meaningful impact is what I would probably say right now.<\/p>\n
So that\u2019s hopefully positive, right?<\/p>\n
Yeah.<\/p>\n
Because we would like, assuming I\u2019m just going to say we would like, but let\u2019s just assume that we would all like to erase these deficits and actually have enough units in the country to meet demand. So we would like to see construction stay at an elevated or at a level that we have currently, or perhaps even higher to erase the deficit that you said.
Now I want to get back to your point about building A Class buildings. And that\u2019s sort of fascinating. I never really thought about how\u2026 It makes so much sense that basically A Class turns to B Class, turns to C Class. And because there was not enough A Class in the early 2010s, now there\u2019s no B Class or C Class even, so that\u2019s really fascinating. And I\u2019m curious, because you\u2019re saying you basically have to build A Class. And for anyone listening, that\u2019s just basically the highest end, nicer level units. Is there demand for A Class? Is there a risk that what is being built doesn\u2019t actually meet what people want or what people can afford?<\/p>\n
So it depends by geography. So you look at places like San Francisco, it\u2019s so expensive to build there. You really have to have a high income to meet that rent. So it depends on geography. We did see in the pandemic a lot of building. We\u2019ve always had a lot of suburban development, but there was a lot of demand for suburban development because people wanted a unit with a den or something like that. So there definitely is demand across the income spectrum.
With the Millennials coming online, it has made it so that a lot of them seem to prefer the lifestyle of renting. You can move from metro to metro. I know when I first started working for the Council, I was living in one place. I paid $500 and actually moved to another state with the same property manager. So there are a lot of benefits like that to renting. You don\u2019t have to pay for your $8,000 HVAC if it goes bad. So folks have started to realize those benefits. So yes, there is demand across the income spectrum. Without some sort of subsidy, you really can\u2019t build anything except for the high end. You can\u2019t make those deals pencil.<\/p>\n
That\u2019s what I\u2019ve seen as well, is that it\u2019s so expensive to just get things permitted basically. It really prevents builders and developers who might otherwise want to build affordable housing and they can\u2019t do it. Does your organization track or advocate or do anything in terms of getting those subsidies? Or do you see that subsidies are starting to become more popular so builders can bring affordable units online?<\/p>\n
So I would say that there is more of a recognition that it is difficult to build. I\u2019m optimistic because of that. It\u2019s still up in the air as to what folks can do about it. The Biden administration has put out a housing plan to try to address some of those impediments. However, there really is a limited amount of things that the federal government can do. It really does come down to the local jurisdictions.
A couple years ago, the Council, myself, and some colleagues put out, it\u2019s called the Housing Affordability Toolkit, and it has a cool infographic that lays out the finances related to building and why it\u2019s so hard to build. And then, it looks at a variety of tools that local jurisdictions can use with local developers to try to actually build things beyond just at the Class A. So things like a voluntary inclusionary zoning policy, where developers can make the choice to take a density bonus so they can build a little bit higher or some more units in exchange for providing some units at a certain income level. And so, that way it achieves both parties\u2019 goals.
There are some other things, too. You can do tax abatement. And it really is though, each jurisdiction has to look at what they have available to them, because what\u2019s going to work in Dallas is not going to work in San Francisco for example. So we are seeing recognition, but unfortunately, there are some short-sighted things that folks want to do instead because it seems like a quick turnaround, like rent control. Folks think that that\u2019ll fix things. That actually makes things worse.
So I spend a lot of my time talking to folks about why things like rent control don\u2019t work or a mandatory inclusionary zoning ordinance don\u2019t work, because then you\u2019re not helping the developer make that lost revenue, and they still have to make their developments pencil. And so, we do work on things like that.
At the federal level, the Council, we advocate for more funding for the Low-Income Housing Tax Credit, which is a way to make more moderate workforce housing. Unfortunately, you still can\u2019t hit the low income targets. You would need some sort of cross-subsidy like housing choice vouchers, which we advocate for more funding for that. It\u2019s otherwise known as Section 8 vouchers. So there are some federal subsidy programs, but they\u2019re way underfunded. What is there gets used, and so we try to make sure that what is there can be used in the best way possible and always ask for more money.<\/p>\n
That\u2019s super helpful. I am very curious about the rent control issue. It\u2019s actually something I\u2019ve always personally just wanted to learn more about, because someone posed the question to me the other day about rent control. And Portland, Oregon was used as an example, because it does have rent control policies. And as of, I think, it was like in May or June, I was looking into it, and it literally had the highest rent growth in the whole country. So how does that make sense? And I know we could do a whole show about this, but can you just give us a quick explainer on why rent control doesn\u2019t actually keep rent low?<\/p>\n
The shortest response is that it\u2019s essentially a lottery system. Not everybody can get a rent controlled unit. There are stories about the old school rent control, which is what everybody knows in New York City. You pass it down generation to generation. Those are not the folks that largely need the unit anymore. There\u2019s lower turnover and they don\u2019t have income verification, so you don\u2019t know that the low-income household that got it in 1952 is still the low-income household in 2022. I shouldn\u2019t say 1952. I can\u2019t remember what year New York City\u2019s was enacted.
But you have these well-intended policies to have rent increases at a more normal rate. So it\u2019s intended so you\u2019re not going to see a 15% rent increase, you\u2019re going to see a 5% increase. Usually it\u2019s the CPI plus 5%. But unfortunately, it starts at CPI plus 5%, and then another city council comes in and they lower it. And then, before you know it, you have what happened in Berkeley, California, where you basically don\u2019t have rent increases. We have these huge cost increases that property owners are trying to absorb for insurance increases, for property tax increases. You need to be able to absorb those costs.
And then, the other problem associated with it is we don\u2019t have rent control around the United States, nor should we have rent control around the United States. So if I\u2019m a developer that is trying to decide between building in a place that has rent control and building in a place that does not have rent control, I\u2019m going to, and all else equal, I\u2019m going to choose a place that doesn\u2019t have rent control.
So we saw that happen last year. St. Paul and Minneapolis both approved rent control ordinances. One went into effect right away in St. Paul, and their development pipeline essentially stopped. So that\u2019s what happens with rent control. And we did do a survey with the National Association of Home Builders a few months ago and found that yeah, folks do just avoid building in places that have inclusionary zoning ordinances or rent control on the books.<\/p>\n
Wow. Okay. That\u2019s super helpful. We might have to do a whole other show about this. I\u2019m sure there\u2019s a lot to this topic.<\/p>\n
There is a ton.<\/p>\n
But thank you for the quick overview. So I want to get to some actionable items for our listeners, because I\u2019m sure people are listening to this and wondering what as an investor they should be thinking about. And the first question that comes to mind is where are you seeing the largest demand? You mentioned Texas, but in your analyses, have you seen other areas that have disproportionately large demand or places that might have falling demand on the other side of the equation?<\/p>\n
Texas is one, Florida is another. They seem to have the highest rent growth right now. There are a lot of cities or metro areas that have been traditionally, I would think of them as single-family centric places like Nashville and Charleston, South Carolina. They\u2019ve seen a lot of demand, but they\u2019ve also seen a lot of building.
So what I tend to look at is I look at the population growth in a certain metro as well as what\u2019s already been built there. And then, also what do you have in terms of employment opportunities? So, yeah. Texas has a ton of building, has a ton of population migration, but they\u2019ve also got a lot of headquarters moving there, which was occurring even before the pandemic.
You look at Plano, Texas, they essentially built an entire new city. They\u2019ve got several huge companies there. Places like Virginia, Northern Virginia, Amazon is going there. And it\u2019s not just in Arlington. They have huge warehouse facilities in Winchester, which is not that far. Those are all things I look for. Again, places like Nashville, Charleston, they\u2019ve gotten a lot of attention, but they\u2019ve also gotten a lot of building, so they would be too that I don\u2019t quite see quite so much necessary construction going forward.<\/p>\n
Is there anywhere that our audience can find some of this data that\u2019s publicly available or easily digestible that you recommend?<\/p>\n
Yes. So if you go to www.weareapartments.org, it has a map of the US and it will have the total demand for the US, and then all 50 states and DC, as well as 50 metro areas.<\/p>\n
Oh, wow. That\u2019s very cool. I did not know about that. And I love the URL. So weareapartments.com. We\u2019ll definitely put a link.<\/p>\n
Yeah, weareapartments.org.<\/p>\n
Dot org, excuse me.<\/p>\n
Yes.<\/p>\n
And we will put a link to that in our show notes. So you mentioned at the top of the show that rents were still growing pretty quickly. What are you seeing in terms of rent growth? How fast is it growing, and is there any signs that it\u2019s starting to slow down?<\/p>\n
So anecdotally, yes, we\u2019re hearing it\u2019s slowing down. However, it has not shown up in the data as of yet. So nationally, the rent growth, from RealPage, which is one of our private data providers, was 14.5% year-over-year in the second quarter, pretty high. So we\u2019re expecting, and again, anecdotally expecting that rent growth to go down a little bit. I should note that that 14.5%, that\u2019s professionally managed apartments, so they tend to skew a little towards the higher end. So mom and pops are not captured in that data. But I took a look, and I believe of the 200 or so metro areas that RealPage covers, all but maybe a dozen had double-digit rent growth. It was pretty crazy.<\/p>\n
Wow. That is remarkable. We\u2019ve been seeing those double-digit numbers for, I guess, was it more than two years now? It felt unsustainable even at the beginning of that. And now, a few years later, we\u2019re still seeing that. But you said anecdotally, I\u2019m sure in addition to data, which of course lags by at least a month or so, it sounds like some of your operators are seeing that maybe start to slow down a bit?<\/p>\n
Yeah. Anecdotally, we\u2019re hearing that. So again, you mentioned it\u2019s a couple years that this has been happening. We had a lot of change at the beginning of the pandemic. Folks fled the cities, so we saw a decline. So for a while, that double-digit increase was just getting back to where we would have been had the pandemic not occurred basically, but we have well surpassed that now. But yeah, some of the apartments that have been in the pipeline for quite a while have started to deliver. So the thought is that this rent growth, we\u2019ve probably hit our top. But that\u2019s not necessarily a bad thing, because it\u2019s easier to project out with less volatility.<\/p>\n
Yeah. That makes sense. And to your point about affordability, if rent growth keeps going up at a much faster rate than wage growth is going up like it is right now, that could definitely exacerbate the affordability problem that we\u2019re seeing in a lot of markets right now.<\/p>\n
We saw in the beginning, obviously, there was the Rent Relief that was passed in Congress. But now we\u2019ve seen with what\u2019s going on with the stock market and interest rates, we\u2019ve started to see kind of the higher end of the economy of the workforce be hit a little bit more, so that might be impacting things as well. It\u2019s obviously not concerning at this point, but it might put a little bit of a damper on things.<\/p>\n
Last week, we were doing a show, and one of our panelists who is a regular on the show, her name is Kathy Fettke, was talking about some deals that she was looking at, multi-families that she was considering investing in. And she was saying that she felt like multi-family pricing for purchases, not rent, hasn\u2019t adjusted yet. We\u2019ve started to see at least in a few select markets on the West Coast in the single-family market, prices are coming down a little bit off their peak. Is there any evidence that pricing in the multi-family market has changed at all to date or is likely to change?<\/p>\n
I think it\u2019s likely to change. Again, I\u2019ve only heard anecdotal stuff so far. It hasn\u2019t shown up in the numbers. So second quarter, Real Capital Analytics, who track a lot of the bigger purchases, I think their threshold is a million and a half maybe per transaction, they still had historic highs, in terms of sales volume. But I definitely know it\u2019s something that people are conscious of, that deals need to be repriced, or some deals will need to be repriced, I should say. I would expect that to start to happen more.<\/p>\n
Yeah. I was looking at your data and it seemed like in, I think it was Q2 2022, correct me if I\u2019m wrong, the sales volume for total deals done was one of the highest it\u2019s ever been. Is that right?<\/p>\n
Yeah. And so, the tracking started in \u201901. It still hit a historic high in the second quarter.<\/p>\n
Yeah. I think anecdotally we see that, just that bigger pockets in general. There\u2019s just been a huge amount of interest in multi-family housing because of the things we\u2019ve been talking about. There\u2019s a lot of demand, rent growth has been really strong, it\u2019s an attractive option.
But we were chatting before the show. You were sharing some data with me that cap rates, which for anyone listening to, is basically a way of valuing multi-family properties based off of their income. And generally speaking, sellers want to sell at a low cap rate, because that means they get more money for each dollar of rent they collect, essentially. And I\u2019m really oversimplifying here. But buyers also want to buy at a higher cap rate. But right now cap rates are, you said extremely low, right?<\/p>\n
They\u2019ve been low for quite a while. But in second quarter of \u201922, they were 4.5%, and that was down from 5% in the second quarter of 2021. So yeah, they are low. A lot of people tend to compare single-family and multi-family, but a lot of the competition from multi-family comes from other commercial types, so retail office. And so, we have the benefit that comparing to office, that performance is still quite strong.<\/p>\n
Oh, that\u2019s interesting. And do you see that or do you expect that demand is up in multi-family because retail and office have sort of taken a hit over the last couple of years?<\/p>\n
There were folks that needed to get money out the door for a variety of reasons. And if you\u2019re competing for\u2026 Now, we did have the kind of side note of the single-family build-for-rent, which is a very new phenomenon, so that has changed the game a little bit. But yes, if you need to get money out the door and you have to choose between office, multi-family, and retail, you\u2019re probably going to\u2026 A lot of them chose multi-family. Industrial obviously, is very successful, but yeah, if you\u2019re comparing between those property types, then multi-family generally wins out.<\/p>\n
Yeah. That brings up a great question, because you see cap rate so low and expect that they will rise. And this is just my personal opinion, I think they\u2019ll rise a little bit. But you wonder how much they would rise just because there\u2019s so much demand for apartments as we\u2019ve been talking about, and there\u2019s demand from investors because it is relatively the most attractive property type as you said, or at least has been over the last few years. We don\u2019t know what will happen in the future, but it does make you wonder how much they would rise. And if deals do start to get repriced, how dramatic that adjustment might be.<\/p>\n
Yeah. I think we\u2019re still in the wait and see scenario, because we don\u2019t know how much more interest rates will rise, what\u2019s going to go on with the other sectors. I know there\u2019s a lot of talk about adaptive reuse. We\u2019re trying to work on some research for that. So changing a suburban office park into apartments is not an easy feat, but it\u2019s definitely getting talked about more. I know I drove by a completely empty office park the other day and was like, \u201cThey need to do something with that. It\u2019s been like this for years at this point.\u201d So I think that folks are still trying to figure out what to do. But yeah, cap rates are low. So I think that if they went up, I wouldn\u2019t be shocked.<\/p>\n
I love the idea of adaptive used too, by the way. I was talking to someone about that this weekend, that there\u2019s just a lot of office space, in particular, that could be repurposed into multi-family housing. And like you said, not easy, but an interesting prospect. It\u2019d be cool if they could figure that out.
The last thing I really wanted to talk about was over the last few years, there has been a lot made about institutional investors entering the housing market. And you just touched on it a little bit, because a lot of the build-for-rent phenomenon has been driven by those institutional investors. Are institutional investors\u2026 Traditionally, they are more into multi-family. These are big, high dollar buildings. But has the amount of dollars flowing into multi-family from these large hedge funds and other institutional investors increased over the last few years?<\/p>\n
I don\u2019t know if it\u2019s increased in terms of volume. It\u2019s hard to get data on that. If you look at our top 50 though, it\u2019s undeniable that there are certain companies, private equity funds, for example, that are at the top of the list. I would say, however, I don\u2019t know that there is a universally accepted definition of private equity. There is actually an official one, but that\u2019s not what people think when they think private equity.
For example, there is a company on the top 50 that has been at the top of the top 50 for quite a while. And I actually had to Google that they were private equity owned, because I didn\u2019t even realize it because I think of them as a traditional multi-family manager. I think that private equity can mean different things, and that\u2019s typically what people talk about when they talk about institutional ownership, are those private equity firms.
Undeniable that there are some things that don\u2019t go right when you have institutional capital coming in, but there are a lot of things that can go well. You have an economy of scale, and so when you look at what happened with the pandemic, some of these companies were able to put in place rent freezes, their own voluntary eviction moratoriums, because they could afford to absorb that hit. It\u2019s a double-edged sword. I don\u2019t deny that. There\u2019s a lot more attention to it. The size, if you look at the number of units owned on the top 50, has remained largely constant over time. There\u2019s actually a company that\u2019s owned more units in the mid-nineties than one of the big top 50 firms now. I can\u2019t remember if they officially surpassed the nineties height, but yeah, there\u2019s always been economies of scale.<\/p>\n
All right. Thank you. Yeah, it\u2019s just interesting. Honestly, I\u2019m not happy about it, but it makes me feel a little\u2026 I also struggle to find data about institutional investors, especially in the single-family market. And it seems that everyone who puts out a report has an entirely different methodology for how they\u2019re getting that. And so, you can never really get a consistent answer. And you hear all this anecdotal evidence about it, but it\u2019s really hard to quantify what the impact of these institutional investors are, it sounds like both for single-family and the multi-family housing market.<\/p>\n
Well, it\u2019s especially weird on the single-family side, because you have the single-family rentals and then you have the single-family build-for-rent, which a lot of our members, multi-family members have started investing in the single-family build-for-rent, because it\u2019s essentially an apartment community, they\u2019re just single-family, detached houses. But they\u2019re all in the same community. They all can have the same benefits of multi-family renting. So you can have your maintenance crew out there. You can have your leasing office out there. So it\u2019s essentially the same thing, but single-family detached. And so, you have to figure out how do you quantify that, because a scattered site, single-family rental who were a lot of the big, bad institutional ownership, that\u2019s a completely separate phenomenon.<\/p>\n
Yeah, that\u2019s a good point. It is really just an apartment community, it\u2019s just a slightly different property type. So this has been very enlightening. Caitlin, thank you. Is there anything else you think our audience should know about the state of the multi-family housing market or where you think it might be going over the next few years?<\/p>\n
I would say since it\u2019s multi-family investors, a lot of folks will look at things like cap rates and sales volumes. And yes, they are important, but at the end of the day, it\u2019s the underlying demand. I\u2019m a land use planner by training, so that\u2019s kind of where I default to anyway. But you have to know where the people are going and where they want to work and where they want to live.
So there are some TBDs, still. The teleworking phenomenon, we don\u2019t know if that\u2019s going to stay. I was a teleworker before it was cool in the pandemic. You don\u2019t know how often folks are going to get required to be in the office. We\u2019ve seen some stories about Boise, where maybe people have had to move away because the teleworking wasn\u2019t as permanent as they expected. Where I live, West Virginia, they\u2019ve tried to bring more teleworkers. And I don\u2019t think it\u2019s been hugely successful under their programs, so I think that part of the demand is still TBD. And if you\u2019re really looking for places to invest, I would look at places that maybe are beyond the teleworking phenomenon and have good fundamentals there.<\/p>\n
That\u2019s great advice. We actually just did a show on work from home, and we brought in a lot of data and it\u2019s really interesting. And my hypothesis was sort of like, I don\u2019t think there\u2019s going to be more teleworking go forward. I don\u2019t think any companies that have held out on remote work are going to start adding it right now. But I\u2019ve already started to see just talking to friends who work at large, publicly traded companies, they are starting to step it back a little bit. And even though they stated a work from home policy are now saying, \u201cEh, you might need to be in the office one or two days a week.\u201d And it could be interesting to see if that reverses any of the migration trends that we\u2019ve seen over the last couple of years or at least slows down probably some of the ones that we\u2019ve seen.<\/p>\n
I did my dissertation work on population, metropolitan development. A lot of the older literature talks about how it\u2019s really proximity to a major airport.<\/p>\n
Really?<\/p>\n
Yeah. Which is at least is true for me. I\u2019m the example of one. I live closer to Dulles Airport than I do to my office in DC. Because if you\u2019re not going to live near where your office is, at least I can hop on a plane and get to a conference really easily. And that\u2019s true for a lot of teleworkers apparently.<\/p>\n
That\u2019s super interesting. I never thought about that at all. Well, Caitlin, thank you so much for being here. If people want to read your research or learn more about you, what\u2019s the best place to connect?<\/p>\n