— By Ryan Hanks, CEO, Madison Capital —
The combination of the flight from urban markets to the suburbs in the work-from-home era, the lack of accessible housing inventory and the rising cost of renting has led to a housing and affordability crisis for middle-class Americans nationally.
Faced with its own challenges, including rising labor costs and an increasingly uncertain economic outlook, the multifamily industry has largely struggled to crack the code to arrive at a solution.
The good news is that forward-thinking developers are deploying and refining strategies and products aimed directly at that middle-market gap in the housing supply: reliable, sustainable, and cost-effective formulas and solutions both literally and figuratively designed to meet that market need.
Understanding why this approach is a successful, important and even necessary piece of the multifamily puzzle — especially at this unique moment — is valuable for investors looking to gain a better understanding of multifamily assets and market dynamics. What follows is a look at how we got here, what’s next for middle-market multifamily, and what it all might mean for investors looking to capitalize on the current imbalance.
How Did We Get Here?
While the flight to suburbia is commonly and correctly cited as one of the contributing factors that have flattened the supply-demand curve and made middle-market housing product feel like an increasingly scarce commodity, the reality is that there are many forces at play.
Pandemic pressures have further fueled that trend, but the flight to suburbia was already underway before COVID. The majority of multifamily development in the years prior to 2020 was focused on urban infill opportunities. Another factor is the way in which many municipalities have taken steps to make suburban multifamily development more challenging from a regulatory standpoint.
Suburban submarkets often have a significant volume of new single-family housing, putting increased pressure on roads, schools, water and sewer capacity. That infrastructure strain can make a zoning board more reluctant to allow a new multifamily rental housing project.
In conjunction with the flight to suburbia, the result is a shortage of middle-market multifamily housing. In that context, it’s not hard to see how and why landlords have been able to raise rents, especially in suburban submarkets where housing options are more limited.
Priorities and Possibilities
Multifamily as a whole has experienced impressive growth over the past two decades. Multifamily lending volume has trended sharply upward, going from $52 billion to more than $487 billion between 2009 and 2021.
But with the looming prospects of a recession, what should investors be looking at and what opportunities are likely to present themselves in the multifamily space over the next six to 12 months?
Given the clear need for more middle-market multifamily housing product, it seems clear that investors would be wise to identify opportunities with proven sponsors and developers, not just those operators with a track record of success in this space. More specifically, investors need to find sponsors that can create quality product that is accessible and appealing, even in the face of economic or regulatory headwinds.
The market is certainly there. The broad demographic sweet spot in the center of the marketplace contains a virtually unlimited supply of potential renters and residents. At a time when that demand is pushing up against a middle-market supply shortage, there is every reason to think that demand will be met. In other words, renters’ best interests about affordability are largely aligned with investors’ best interests about returns.
As with any investment landscape, scarcity often leads directly to opportunity. That’s why, even at a time when macroeconomic pressures may be present, there are still likely to be abundant multifamily investment opportunities for those who know where to look. Another reason for optimism: during recessionary environments there will inevitably be opportunities that arise from the dysfunction in the capital markets. Usually, you see values reset and costs come down, which could ultimately yield even better returns.
Cracking the Code
What do multifamily professionals need to do to crack the code and deliver the much-needed quality product the market is missing? It’s one thing to acknowledge the need for accessible, high-quality multifamily environments, but delivering during a period of economic uncertainty and instability in a way that consistently creates value is something else entirely.
It all starts with the basics: the right market, the right asset class and the right price. Building properties with the features, amenities and build and design quality associated with higher-end offerings requires an ability to capitalize on economies of scale and deploy well-honed operational, procedural and structural efficiencies. The construction process also requires strategic design decisions specifically intended to generate further savings without sacrificing quality.
That said, recessionary pressures and an inflationary environment that has jacked up the cost of construction materials means that there is ultimately only so much that can be done to “crack the code.”
Hyperlocal opportunities are likely to loom large, as certain pockets throughout the country will present themselves as favorable to middle-market development. We will see accomplished middle-market multifamily developers gravitate toward those markets. They might be secondary or tertiary markets, or they could be select submarkets within larger metropolitan statistical areas (MSAs).
The majority of multifamily development and investment opportunities will be in markets with rent growth and an easier path toward getting projects permitted without impact fees, school fees, U.S. Department of Transportation requirements and other regulatory obstacles.
In that three-pronged “right market, right asset class and right price” formula, it might ultimately be that location is the biggest factor in determining ultimate success.
Ryan Hanks is founder and CEO of Charlotte-based Madison Capital, a vertically integrated real estate investment firm that owns, operates, acquires and develops suburban multifamily properties and self-storage facilities. To reach Ryan directly, email ryan@madisoncapgroup.com.