For about a year now, investors have been expecting a collapse in apartment values along with a corresponding decrease in rents. We’ve argued against this thesis, expecting rents to hold up and support multi-family housing prices.
Today we’d like to share a few data points that highlight the resiliency of the apartment sector and show why we still like this investment relative to public bonds.
New Supply Has Stalled
Historically when rents rise quickly and occupancy rates move into the 90% plus range, builders respond with new supply. This new supply puts pressure on existing units and leads to lower occupancy and lower rents.
The market attempted to follow this cycle briefly in 2022, but the rapid increase in interest rates made new construction projects unprofitable.
The housing market is still many millions of units short of demand and new starts have declined quickly over the last year.
Renters Trapped By High Purchase Costs
The lack of new rental unit supply is being compounded by the lack of affordability to purchase a home. In the last four years, the monthly payment for the median home purchase has increased by over 80%.
It is almost 50% more expensive to buy than rent. This monthly payment differential and the large down payment required to buy, have trapped renters in existing units.
Home purchase volumes are the lowest they have been since the 1990s. Without significant mortgage rate relief or huge declines in home prices, we expect people to continue to rent, keeping occupancy rates high.
Rents Still Rising
Both of these factors can been seen in the continued march higher in rents.
Per the Bureau of Labor Statistics, rents are still rising at over a 5% annualized rate this year.
Our outlook for multi-family housing is for long-term rent growth in the 3-4% per year range. This would lead to long-term expected returns in this sector of 7-8% annualized.
We view this as good risk/reward relative to the existing public bond market expected returns of 4-5%. In the three years we’ve owned our private real estate exposure, it has produced 11% annualized returns vs. the public bond markets of -4% annualized returns.
So we continue to like our investment in this space, but we are finding other private fixed income opportunities that may offer higher expected returns. As we explore these other investments, we may trim down our real estate exposure to reallocate funds to these better risk/reward opportunities. We’ll keep you posted.
