COVID-19 came like a thief of the night all over the world. From everyday living to work, we have witnessed major changes in just one (1) year. Despite all the uncertainties, it is safe to presume that real estate investment will not do anything well. For that very reason, a lot of individuals have followed suit and shied away from these classes of assets since the emergence of the pandemic.
But for others, see the market and outlook from a different perspective. For seasoned real estate investors who had been through significant market ups and downs, and took advantage of the long-term effect of operating and owning properties during uncertainties, this pandemic will just be a walk in the park for you. In the realm of real estate investing, we are witnessing more stable areas with positive growth in multifamily assets as compared to the emergence of a worldwide pandemic. As time goes by, it is anticipated that drastic change in the capital with multifamily, making this class of real estate asset class the hidden treasure in the realm of investment. We have listed four (4) possible reasons for such, as follows:
Impacts on Demand as well as Generational Shifts. There is a true movement in the wants and needs of the primary and dominant members of the people of today. Millennials have continued to be a big help for multifamily properties, as they now regard themselves renting for a long period. Tons entice millennials to engage in multifamily options, such as the rental flexibility, low barrier to engage like no down payment scheme, and a change from the traditional dream of owning a property. This makes them lean towards multifamily kind of living minus the financial issues that come with buying a property. To add, it supplements flexibility on individuals if they want to relocate or move regardless of the reason. Ergo, this trend simply translates to greater demand for multifamily properties.
The Shocking supply of multifamily properties. With traditional pandemic-related risks, lack of entire visibility, and economic instability, new supply is somehow restricted and guarded. Based on assumptions, it is predicted that novel developments will still manifest but at a pace slower because of the uncertainty in the market. Common developers that construct high-rise properties in urban locations are not sure of demand because of the dense-city flight and of course, the emergence of the pandemic brought about by COVID-19. Renters are moving out of high cost-of-living locations and dense communities like New York and San Francisco for less dense locations and affordable cities like Texas. With lesser multifamily housing properties showing onto the market, especially in the affordable class, the supply side is anticipated to remain constrained. At the end of the day, it is the fundamental economics: Enhance demand and lower supply means higher demand destined for multifamily property managers and owners.
Investor Demand Together with Low Rates Results in Compression of Cap Rates. The cap rate, or more commonly known as the capitalization rate, specifies the income divided by the purchase price. Cap rate compression manifests when investors are willing to pay a premium for a similar amount of income. United States Treasury bonds can be utilized as a benchmark versus cap rates to know the spread against a risk-free bond.
In the scenario of the present economic context, the spread between decade-long treasuries and capitalization rates is higher as compared to levels of the historical average. Traditionally, the spread is pegged at 2.5%. But, at this point, cap rates are averaging around 4.75% to 5%, and the decade-long Treasury bond is pegged at almost 1%, making the spread almost posted at 4%. Ergo, there is room destined for cap rate compression, which means an advantage on the present buyer and higher prospective valuations.
Further, the M2 Money supply which is a measure of money supply in the economic system appears to be like a hockey club, with a present figure of almost 19 trillion dollars. Based on the Federal Reserve, federal rates are anticipated to be nil by the end of 2023. It simply means that an enhanced supply of capital will be pursuing transactions, placing a solid pressure in terms of pricing.
Resilience to Pandemic and Recession. It is a known fact that COVID-19 has caused a noteworthy economic downturn across the board. However, multifamily has always endured drastic fluctuations in the market. They stated two (2) reasons for this:
- Federal governments are extremely motivated to support citizens financially so that individuals can be able to afford their rents. Of course, one will not forget the CARES Act $1200 stimulus check at the emergence of the pandemic. There is an intrinsic desire to aid individuals along and carry them utilizing their financial burden with government help during trying times.
- Housing is a fundamental human requirement. Even in difficult times, lessees will do their best to answer for their rent and maintain a shelter. Multifamily properties recognized as class B and C tend to be located along main commuter roads, giving freedom for the tenants to get to work in no time, making it a lot enticing. For the owner, multifamily properties can give a tangible asset together with capital appreciation while giving a steady income.
Multifamily housing is not going anywhere anytime in the future. It only goes out to show that it is justified as one of the very solid asset classes for real estate investing, even during trying times like this pandemic. It is highly recommended for investors to diversify their portfolios in real estate, specifically multifamily properties. It is quite an obvious selection for a place to invest in in 2021 and the years after that.
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