Top 5 Markets for Multifamily Investment Growth
In this article, we analyzed the top multifamily markets for investment growth in the 12 months ending in September, using CBRE data.
Image by Leohoho from Unsplash.
The multifamily real estate market has remained a strong player in the commercial real estate sector, with $69 billion in investment volume in the third quarter of 2022 — the highest volume recorded across all sectors, according to CBRE’s third-quarter capital markets report.
Despite the Federal Reserve increasing interest rates to a record high of 3.75% to 4.25%, investors are still seeing opportunities in the multifamily space as rental demand is still steady across the U.S. The higher cost of capital, coupled with inflation and stagnating wage growth, is driving more people to rent rather than buy.
That’s not to say that the rate hikes don’t pose challenges to the multifamily sector, but compared to other sectors, such as office, retail, or hotels, it is poised to weather the storm more easily. And, needless to say, some markets offer more opportunities than others.
Looking at CBRE data, we examined the top five multifamily markets with the highest investment growth for trailing-four-quarter investment volume ending in Q3 2022. The metros on the list are fast-growing secondary markets, offering a lower cost of living and high quality of life.
Investment Volume ($B, Year Ending in Q3 2022 )
Multifamily investment in Indianapolis has been on the rise in recent years. In the 12 months ending in September, transactions increased 97.5%, with total investment volume accounting for more than $3.3 billion over the same period.
This surge in investment is due, in part, to strong economic fundamentals and the favorable demographics of the city. Indianapolis is home to several large employers, such as the pharmaceutical company Eli Lilly and the Indiana University School of Medicine, which help to attract a young and educated workforce.
Additionally, the city's cost of living is relatively low, making it an attractive destination for families and retirees alike. As a result of these factors, multifamily investment is likely to continue to be strong in Indianapolis in the years to come.
4. San Antonio
San Antonio is another metro with strong economic and demographic performance in recent years, underscoring growth in the multifamily sector. Transaction volume in the metro totaled nearly $6.7 billion during the 12 months ending in September, up nearly 100% year-over-year.
Although today’s economy is making rent growth hit a standstill across the country, thanks to low deliveries and a slowing pipeline in recent months, San Antonio will likely remain an attractive market for multifamily investments in the coming months.
Image by Julian Paefgen from Unsplash.
3. Las Vegas
Although Las Vegas was one of the hardest hit metros during COVID-19 due to its reliance on tourism, a high influx of residents in recent years kept its multifamily market healthy. Over the 12 months ending in September, Las Vegas recorded $5.6 billion in multifamily sales, up nearly 103% on an annual basis.
Sales activity in the market, however, will likely decrease in the coming months due to the high-interest rate environment. Nonetheless, demand in the rental sector should remain steady as homebuying becomes increasingly unattainable for many people.
On par with other metros on the list, Nashville’s multifamily market remained a solid performer in 2022, thanks to its diverse economy and strong population growth in recent years. Employment growth in the metro accounted for 4.9% in August 2022 — highly above the 3.8% national growth, according to a report from Colliers. Overall, Nashville added 52,300 jobs during the 12 months ending in August.
Given the metro’s strong fundamentals, it’s not surprising that multifamily investors flocked to the city. During the 12 months ending in September, Nashville saw more than $7.7 billion in closed multifamily deals, up 136.9% year-over-year.
Similar to Las Vegas, Orlando took a major hit at the onset of the pandemic but bounced back quickly, thanks to an uptick in population growth, coupled with company relocations from gateway markets. Over the past year, several companies announced plans to expand or move to the metro, including InnovaCare Health Inc., Sonesta International Hotels Corp., KPMG, and Disney, GlobeSt. reported.
As a result of a strong economic expansion, Orlando’s commercial real estate market has experienced robust growth across most major sectors. With multifamily rent growth in the double digits for most of the year, Orlando recorded $11.7 billion in multifamily investment over the 12 months ending in September, up more than 176% on an annual basis.
At the same time, Orlando saw high investment growth in the industrial sector, with $1.8 billion in industrial sales during the same period, up 100% year-over-year. Meanwhile, office investments were up 128% during the same time frame, according to CBRE.
What are the best markets for multifamily investment growth?
The five multifamily markets with the fastest growing sale prices per unit last year are Austin, TX; Nashville, TN; Las Vegas, NV; Phoenix, AZ; and Orlando, FL. Of course, it’s important to note that previous growth in property values doesn’t mean anything if that growth doesn’t continue — but each of the markets on our list has solid underlying multifamily market fundamentals that should keep them resilient, even in the face of an economic downturn.
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What are the benefits of investing in multifamily real estate?
Investing in multifamily real estate can provide a number of benefits, including potential for high investment returns, the ability to take advantage of compounding returns, and the ability to diversify your investment portfolio. Additionally, multifamily properties provide reliable monthly cash flow from renters due to reduced risk of vacancies.
For more information, please see the following sources:
What are the risks associated with investing in multifamily real estate?
The risks associated with investing in multifamily real estate include expensive purchase costs, rising construction costs, construction delays, and the possibility that the renovation work may not be enough to get the desired investment outcome. Buying multifamily properties is significantly more expensive than buying single-family homes, therefore, it is usually hard to enter the market as a first-time real estate investor. Banks are usually eager to provide loans, but buyers should be able to come with around a 20% downpayment, depending on the real estate market or the size of the property. Source 1.
Construction costs have risen dramatically over the past few years, impacting both ground-up development projects and renovation work. Source 2. Construction delays are also an unfortunate fact of life, so it may be best to take a very conservative approach in terms of your project timeline. Finally, your renovation work may simply not be enough to get the investment outcome you’re looking for. Source 2.
What are the current trends in multifamily real estate investment?
The multifamily sector has long been regarded as one of the safest investment options in times of uncertainty. The persistent housing shortage and the rapidly rising cost of owning a home are driving healthy property fundamentals, making multifamily the desired investment option. According to Freddie Mac®’s predictions, multifamily origination volume is estimated to expand to $317 billion in 2019, a nearly 4% increase from the approximate $305 billion of multifamily financing originated in 2018. Factors that can be attributed to this trend include consistent investor demand for apartment properties, as well as other market forces, including a strong economy, reasonable job growth, and low interest rates.
What are the most important factors to consider when investing in multifamily real estate?
When investing in multifamily real estate, the most important factors to consider are:
- Your investment objectives
- The type of property you want to purchase
- How you will handle the everyday operations of the property
- Market conditions
- Available capital
- Operational plans
- Utilization of property management companies
- Expected operating expenditures
For more information, please see the following sources:
What are the best strategies for investing in multifamily real estate?
The best strategies for investing in multifamily real estate depend on your goals and risk tolerance. Generally, the top 5 strategies are:
- Buy & Hold: This strategy involves buying an investment property and holding onto it for an extended period of time, usually five to 10 years or longer. The benefits of this strategy are that it allows you to build equity in the property and eventually sell it for a profit. The downside is that it ties up your capital in one property for an extended period of time, which limits your ability to invest in other opportunities. (Source)
- Add Another Investor: This strategy involves bringing on another investor to help you finance the purchase of an investment property. The benefit of this strategy is that it allows you to buy a property with less money down, which frees up capital for other investments. The downside is that you will have to give up some control over the property and will not see as much upside when the property appreciates in value. (Source)
If you are looking for financing for your multifamily real estate investment, you may want to consider a commercial real estate loan. Commercial real estate loans typically have longer terms and lower interest rates than other types of financing. Depending on the lender, you may be able to get a loan with a fixed or adjustable rate, and you may be able to get a loan with a balloon payment. (Source)