Commercial Investment Real Estate July/August 2016

INVESTMENT ANALYSIS Shifting Paradigms Millennials and wage stagnation raising multifamily investments to new heights. by Gregg Gerken L Last year, 43 million American households rented their residences, according to Harvard University’s Joint Center for Housing Studies. According to Harvard’s Joint Center, this “decade-long surge in rental demand [was] unprecedented.” Whether as a result of wage growth topping out at around 3.3 percent since the Great Recession, the changing priorities among a new generation of households or some combination therein, there are opportunities for investors in the multifamily market. Looking at Ripple Markets In New York City and Washington, D.C., a significant amount of Class A multifam- ily housing has come online, stabilizing vacancy rates as the supply begins to out-  July | August | 2016 pace demand and investors find it harder to gain return on investment. In November 2015, Manhattan apartment vacancies hit their highest in nearly a decade, according to a Bloomberg report. In general, inves- tors should anticipate leveling to decreas- ing rents as more mature markets become increasingly competitive. While some of the major real estate mar- kets begin to slow down, however, ripple markets present a growing area of opportu- nity. With regard to the New York City area, Queens and Jersey City are good examples of this phenomenon. Evaluating Returns Many owners and management compa- nies are already planning for a new nor- mal of stagnating rents to become the norm, insisting that projects in progress or planned for the future be priced according to today’s rents and without the assump- tion of a ceiling-less marketplace for rent- ers. By planning an investment in multi- family properties accounting for little to no rent growth, investors can avoid surprises down the road when market dynamics shift in favor of renters. The good news is that for properties that have seen a leveling of rents, the low rate Commercial Investment Real Estate The two big factors affecting the market in the second half of 2016 are an uptick in overall household formation and increased demand for multifamily housing. Household formation dropped nearly 2 percent from 2006 to 2008, according to the U.S. Depart- ment of Commerce. However, recent incre- mental growth, in particular household for- mation outpacing home ownership in early 2015, has reversed what could have been an extended downturn. This increase in households has generated a mini-boom. From 2009 through 2012, the increase in households has exceeded the housing supply growth. As a result, the multifamily market has been playing catch-up. The implications for this mini- boom, as well as a cooling off period that has begun in certain regions, may vary, but overall the multifamily market as a whole offers opportunities for investors. The fol- lowing are several points to consider as you evaluate multifamily housing investment opportunities.

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