FEATURE ARTICLE, DECEMBER 2008

WHY MULTIFAMILY REMAINS A GOOD INVESTMENT
The multifamily sector continues to yield a solid return despite the economic downturn.
Jeffrey P. Weiner and Jason A. Pucci

With the value of residential real estate in decline and the stock market plummeting, investors are wondering where to invest their money. Even “safe” investments such as savings accounts, money market funds and certificates of deposit hold little allure: with interest rates as low as they are, inflation will eat up after-tax returns from such accounts. 

But there is one investment that continues to yield a solid return despite the ailing economy: multifamily housing. The reason is the downside protection offered by a steady flow of rental income.

No matter how bad the economy gets, people still need a roof over their heads, and rent will come ahead of car payments, credit card debt and other financial obligations. Indeed, the more people who are forced out of their homes by foreclosures, are unable to buy a home due to tight credit or are unwilling to buy a home due to uncertainty about the future of the for-sale housing market, the greater the demand for rental housing. Moreover, the New York metro area’s extraordinarily dense — and growing — population continues to fuel demand, and the population has some of the highest household incomes in the nation.

Because of this demand, The Kislak Company, Inc. continues to close a large number of apartment house deals, and we see no prospect of the demand abating. And although credit remains tight, interest rates are at a historic low for borrowers with good credit, enhancing their ability to purchase such properties. 

In 2007, for instance, multifamily investments yielded an average annual return of 16 percent, compared to 11 percent for the Standard & Poor’s 500 Index and 13.7 percent for the NASDAQ Stock Market, according to a study by NAREIT, the National Association of Real Estate Investment Trusts. And that was well before the stock market took its recent nosedive as a result of the credit crunch.

Multifamily also holds more appeal than other types of commercial real estate investments because of the downside protection. As our clients often point out, if they lose a tenant or two they lose a few hundred dollars a month, as opposed to an investment in industrial or other commercial real estate, in which the loss of a single large tenant can result in large losses. 

A recent survey of more than 400 top executives in commercial real estate conducted by DLA Piper, one of the world’s largest law firms, found that 50 percent ranked multifamily as the most attractive commercial real estate investment.

In New Jersey, to pick one state in the region, the rental market was recently described in the New York Times as “vital” and “trending upward.” The overall occupancy rate is 97 percent and rents are rising at an average of 4 to 7 percent a year, depending on the analyst, the Times reported. This extraordinary demand is being fueled in part by bargain-seeking renters who are emigrating from New York and Philadelphia, where rents are considerably higher.

But investing in multifamily housing offers other advantages besides the satisfaction of a solid return. In this economy, the most important may be its tangibility. In contrast to equities, whose value may evaporate and leave investors with little but a piece of paper of little worth (witness Lehman Brothers and Washington Mutual), investors in multifamily housing have the security of knowing that a deed represents a tangible asset in the form of the structure and the land it rests upon.

Indeed, investors in economically depressed parts of the country are being drawn to the multifamily market by the fact that selling prices represent a fraction of the value of replacing the buildings. While that isn’t the case in the New York metro area, where demand for multifamily properties continues to shore up prices, investors nonetheless have the reassurance of knowing that they are putting their money into bricks and mortar rather than an intangible asset such as a stock certificate.

Another appeal of multifamily is that of control. While investors in equities have little control over an investment that is in the hands of professional managers, investors in multifamily have the ability to affect the return on their investment. Indeed, some of the greatest investment opportunities lie with the acquisition of down-at-the-heels properties with upside potential. As a result of good management — and often, sweat equity — investors can improve their properties, resulting in increased rents and value.  

The potential to improve the value of their investment through their own labor holds great appeal for many of our investors. Investors who are now at the helm of extensive real estate empires often launched their careers years ago with the profit from the improvement of a small rental property that they reinvested in another property, repeating the cycle again and again. Many of our clients are third and even fourth generation descendants of the original investors in multifamily real estate. Few other investments offer such an opportunity to build a legacy for future generations.

Indeed, the hands-on appeal of multifamily housing is greater than ever, thanks to a 70-million-strong baby boom generation that is entering retirement age (the leading age of the baby boomers reaches the traditional retirement age of 62 this year) but may not be ready or able to fully retire. Many members of this generation who are leaving the workforce view owning and managing a rental property as a means of keeping their feet in the workaday world without the restrictions of a 9-to-5 job.

And while dealing with tenants does have its negatives, for many baby boomers the opportunity to interact with people on a day-to-day basis is one of the most rewarding aspects of their investment, as opposed to merely sitting passively on a stock portfolio — or as of late, enduring a white knuckle roller coaster ride.

Although home real estate prices are down in parts of the New York metropolitan area, they are still relatively high compared to the rest of country, which might lead prospective investors to wonder if opportunities still exist in multifamily.

The answer is a resounding yes. While  Class A properties — well-maintained properties with ample amenities in desirable neighborhoods — may not allow investors to make a killing, they still yield a solid return, and Class B or C properties in less desirable areas can offer upside and higher returns. 

The population shift back to urban areas that is being propelled by high gasoline prices, improved public transportation and lack of available land in outlying suburbs offers opportunities for those who are willing to invest time, money and effort in multifamily. Many older properties with 10, 20 or 30 units still exist in cities and inner suburbs, and they can be transformed into stellar performers with TLC in the form of fresh paint, new windows, improved landscaping, and kitchen and bathroom upgrades.

Despite the overall economy, Kislak continues to close deals with investors who recognize multifamily housing as the outstanding investment it is. And with the economy appearing as if it will remain in the doldrums, a new class of potential renters is arising that will fuel the demand for rental housing for years to come.

Jeffrey P. Weiner is president and co-managing director of The Kislak Company, Inc. and Jason A. Pucci, Esq. is the vice president and business manager.


©2008 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.




Search Property Listings


Requirements for
News Sections



Market Highlights and Snapshots


Editorial Calendar


Today's Real Estate News