Should We Still Be in Multifamily?

May 2021
A car is parked in front of a window with the words " pay your tax now here ".

Welcome to tax day 2021!  

But I’m sure you already knew that. Like with everything else over the past year, even our tax deadline changed because of COVID. And by the way if you’re paying too much in taxes, time to invest more in real estate!  Cost segregation and accelerated depreciation allow us to usually hit around $70k tax loss per $100k invested.  Not a bad deal out of the gate. 


Speaking of taxes – the tax law changes are the wild card at the moment. I think there’s reasons on both sides that would both help and hurt the overall real estate market. We’re all paying close attention.  Nonetheless, doubtful that anyone wants to completely ruin their chances for mid-term re-election in a moderate to conservative district so I’m hopeful nothing too crazy happens.     


Before jumping into a bit of a market economic update (thanks in part to some excellent stats from my friends at Newmark), great news from the SEC recently.  If you are part of a 506c syndication and had to go through the effort of getting an Accredited Investor Verification Form, that form is now good for 5 years!  Yep, 5 years.  Up from 90 days.  Win-win and our operations team is jumping for joy. 


From a macro perspective, supply and demand continues to favor buyers by a wide margin. COVID restrictions continue to ebb away, and the economy will get back to full steam. I’m more concerned about it blowing the lid off too quickly. Partly depends on how much money the government continues to hand out – i.e. people sit on their butts instead of working. It’s definitely holding GDP growth way back. We also need to see some sustained wage inflation too in my opinion.  

  • New multifamily supply remained robust, with 353,453 units delivered over the past 12 months.  
  • The prospects for rental housing remain strong due to lack of available inventory and rapidly rising prices in the single-family market. 

Rates have stabilized for debt markets and bridge guys are pushing rates to agency levels and giving concessions, so it’s an interesting time on the debt side. Same with private equity – finally seeing some adjustment of expectations towards reality from the previous high-teens, low 20s, return down to the low teens. That’s good news.  With spreads where they are, it’s way too much risk to stretch for those types of returns any more. Multifamily mortgage debt outstanding rose to $1.7 trillion, up 8.2% year-over-year. GSE debt outstanding, which accounted for the largest share of debt outstanding at 49.7%, saw a 12.6% increase year-over-year.


Rent collections averaged 94.2% nationwide for the first quarter of 2021 – a slight improvement from 94.0% in the fourth quarter of 2020. The majority of markets are now recording their highest collection rates in over a year. We will all benefit when the eviction moratorium is over.


Lately I’ve been underwriting across all asset classes and am seeing quite a large delta in the A- suburban and core plus market. Not closing the door to our standard workforce housing but adding a new dimension because of this potential arbitrage in the market.  There’s been a ton of focus on B/C value add and a ton of focus on A++ products.  The A- deals are sometimes trading at a discount to their lower quality neighbors.  In general, though, despite operational challenges posed by COVID-19, multifamily annualized total returns as of the first quarter of 2021 were 1.7%. Historically, multifamily has outperformed following recessions.


I believe rents will continue to escalate due to inflation. I believe they will grow faster than my 2-3% assumptions but I’m sticking with my model to be conservative. Expenses will follow so we have to be super vigilant on the expense control. Building out the CAPEX team and attaining economies of scale in our core markets will be key. Insurance expense is also on the hot list for that side of the biz. It is one of the ways our competition can beat us right now. Another 1000 units and I think we can attack it head on.  Trailing twelve month rent growth declined -0.9% in the first quarter of 2021, however rents are projected to rebound sharply over the next two years, nationally reaching 3.3% annual effective rent growth by the end of 2023.  Our core markets will push closer to 7-9%.


The tough part continues to be the buy side competition. That recent deal in Atlanta that we offered on had over 50 offers! Totally out of control.  First quarter sales volume totaled $35.5 billion, declining 12.0% year-over-year. Investor appetite rose for properties throughout the Southeast and Southwest regions, which accounted for 54.7% of total