Investors looking to establish a foothold during a changing economy may want to look into investing in older multifamily construction. As we previously reported, the Federal Interest Rate will likely be on an increase trajectory throughout 2017, leading to many changes in Cap Rates and Loans. Taking advantage of current interest rate numbers could mean the difference for an investment’s ROI. Savvy investors looking to take on these lower interest rates do have a choice, invest in older construction or go for the latest in design? In either case, new data suggests it is still a great time to go multifamily on an investment.
Strength in Fundamentals
Multifamily fundamentals in particular continue to thrive in spite of a looming change to the investment landscape. The Freddie Mac Multifamily Apartment Market Index (AIMI) recently released its report on the national index value for multifamily investments. The index found that national multifamily fundamentals have continued growing stronger. AIMI numbers rose from 110.52 to 110.92, the difference of 40 basis points. This is the third consecutive quarter that multifamily fundamentals have risen, suggesting the market remains strong. “The AIMI index has been indicating a favorable investment environment for apartments since 2009,” explained Freddie Mac Multifamily Research and Modeling vice president Steve Guggenmos explained in a statement. The Freddie Mac study did show a decline year over year in fundamental values, however Guggenmos perceives this decline as leveling to the market. “The Index has been in a consistent range since 2013.”
Older May Be Better
Now that we have established multifamily fundamentals are showing consistency, investors must now consider what kind of property in which to invest. The case could be made that seeking investment in older construction may yield the best ROI in newly released data is considered. A recent study by the Commerce Department has found that the absorption rate (the percentage of a property that is rented within three months of completed construction) may be on the decline. Their study found that newly constructed apartments were only seeing a 58% absorption rate nationally, down 8% from the same period in 2015.
In spite of this decrease in absorption, analysts for MarketWatch suggest that a hunger for rental units will only grow. “The massive baby-boom generation is renting more than earlier generations did at their age.” suggests Andrea Riquier, suggesting that builders are already reacting to these trends by green lighting construction projects. In addition, Riquier suggests changes in the perception of home-ownership continue to drive renters into units. However, with only a 58% absorption rate for new construction, it is reasonable to assume that most renters are forgoing high end amenities in favor of lower rent costs. Many would instead choose to rent in older single family and multifamily units.
As we enter 2017 it is important to reflect on the past in order to make an educated decision tomorrow. It is inevitable that change will come to market trends as the economy continues to thrive. Let these recently released studies act as a road map of what has been happening, guiding you to a successful new year.
The Freddie Mac Multifamily Apartment Market Index can be found HERE
Andrea Riquier’s article “More signs the apartment boom may be fizzling” can be found HERE