Owners and operators of U.S. multifamily properties have been through a lot in recent years. The multifamily market was on fire in 2021 and 2022, a time when rent growth hit record highs due to soaring demand. But the market has since come back down to Earth as fundamentals stabilized. Now, amid ongoing high interest rates, heightened deliveries of supply, and deceleration of job growth, many multifamily investors are exploring different strategies to diversify their portfolios, add revenue, take advantage of opportunities, and maintain a competitive edge.
One growing trend has been traditional multifamily firms broadening and diversifying their investment strategy by expanding into other housing subsectors. Those other subsectors—single-family build to rent, student housing, workforce/affordable housing, and senior housing—have been on investors’ radar for some time, as rental housing markets continue to perform well nationwide.
Long-term secular drivers
Several deeply seated multifamily market fundamentals currently drive investor interest. For one, the nation’s housing stock continues to fall short of the supply needed in the long term, and since 2010, that imbalance has worsened, according to a recent JLL Capital Markets report. Since the Great Recession, a shortage of almost 3.4 million units has opened up.
Additionally, over the last four years, what was once a small gap between the average cost to own a home versus the cost to rent has risen dramatically into a record gap, leading to more people continuing to rent rather than to purchase. Today, on a national basis, owning is 56 percent more expensive than renting—a near-record spread, according to the JLL report.
For those who do own homes, 62 percent have mortgages with rates below 4 percent. The ongoing high-interest-rate environment has made purchasing a new home difficult for many would-be buyers, which has stifled new home sales. This situation has limited the inventory available for first-time home-buyers to tap, keeping renters in place for longer periods.
But traditional multifamily is not alone in attracting significant investor interest at the moment. Several subsectors, some of which are considered “recession-proof,” are bringing in first-time investors.
Senior housing, student housing, single-family rentals (SFR)/build to rent (BTR), and workforce/affordable housing have all experienced an uptick in first-time investment from domestic and foreign investors, according to JLL, as they look for higher yields from alternative asset classes.
Leveraging expertise
With a lot of dry powder being kept in reserve, industry experts are expecting more capital to return to the market in the second half of this year—after the market bottomed out earlier in 2024. This forecast, along with the resilient fundamentals of the multifamily market and increased interest in niche living sectors, has many professionals expecting more multifamily investors to expand their investment strategy within the sector.
Major institutional players have also been making big moves in multifamily recently, such as KKR’s $2.1 billion multifamily portfolio purchase from Quarterra, and Equity Residential’s nearly $1 billion multifamily purchase from Blackstone. Many industry watchers see such activity as a vote of confidence for the multifamily sector in the near term.
“Over the past couple of years in the U.S., and also globally, we’ve really seen an advent of thematic investing,” says Lauro Ferroni, head of Capital Markets Research for the Americas at JLL. “Investors are latching onto a strategy or sector that is underpinned by a lot more than just cyclical trends—[ones that are] really structural trends.”
Those structural trends—namely the national undersupply of housing—are inherently benefiting each of the different multifamily rental models. Many sophisticated investors looking to gain additional yield outside of conventional market rate rentals are getting educated on such sectors as single-family rentals and student housing, and those investors seek opportunities where they can be early movers. For instance, Greystar, one of the top apartment owners in the country, expanded into the senior housing, student housing, and modular housing markets in recent years.
“I think companies are looking to leverage their existing expertise, and [to] broaden and diversify their revenue base to what’s currently defined as different bases, but are fundamentally multifamily to some degree,” says Dave Borsos, vice president of Capital Markets at the National Multifamily Housing Council.
Borsos has seen not only traditional multifamily investors expanding into alternative living sectors but also student housing owners and operators begin investing in traditional multifamily properties. The firms looking to diversify their revenue are motivated by the similarities that the niche sectors present in terms of operations and management, and, from an investment standpoint, the ability to shift focus if one market gets constrained while another becomes more favorable.
