Why Invest in Apartments
Unlike residential property, the value of commercial real estate, which includes apartments, is tied to the income they generate as opposed to the price of neighboring properties. As a result, the value of the property is more in the owner’s control than just at the whim of the economy. Owners can fill vacancies, raise rents, and add other revenue generating services to not only increase cash flow, but also the underlying value of the property.
Apartments are the most stable asset class in the commercial real estate sectors due to the factors listed below and for the simple reason that people need a place to live --even if they don’t have a job, need to cut back on spending, or cancel vacations..
The apartment sector is entering an era of high demand and low supply. This is because the population of renters is growing, while the recession has put a damper on new developments. In addition to a lack of new construction, other market drivers include favorable demographic trends and a reversal in homeownership rates. Now is the perfect time for investors to take advantage of these market dynamics by acquiring apartment properties and locking in still-low interest rates ahead of rent growth.
Let’s take a closer look at some of the market dynamics that are creating a compelling case for investing in apartment properties:
Demographic Trends:
- The biggest demographic trend affecting the apartment industry is the aging of echo boomers into the target age bracket for renters (20 to 34 years of age); over the next five years this age bracket will expand by approximately 3.2 million individuals.
- The second largest renter profile is immigrants; most estimates indicate immigrants are being added to the population at a rate of 1.5 million/year and this number is projected to grow.
- With tight residential mortgage standards expected to endure for several years to come, a large portion of the echo boomer and immigrant populations will remain in the rental market.
Homeownership Reversal:
- A reversal in the homeownership rate from 69.2 percent in 2005 to 66.5 percent at the end of 2010 has helped expand the renter pool by more than 3.1 million households.
- People who lost their homes to foreclosure or short sales are either locked out of the loan market and/or are apprehensive about owning again, making them more inclined to rent.
Apartment Construction Activity:
- New rental apartment construction plummeted to a 50-year low in 2009.
- Apartment completions are expected to fall from 108,000 units in 2010 to approximately 70,000 units in 2011---a fraction of the 200,000 to 250,000 units that is the norm.
- Overbuilding in the next three years (2011-2013) is highly unlikely, allowing for a recovery in rents.
Job Growth = Emerging Market:
- The U.S. economy is expected to continue its recovery. Recovery from the “Great Recession,” however, will not be equal throughout the country. Those areas with strong economic growth, also known as emerging markets, will in turn enjoy strong job growth and a higher demand for rentals. These emerging markets are where OceanHead Investment Group focuses their investment activities.