The U.S. economy is emerging from the effects of the COVID-19 pandemic as businesses are reopening and individuals are returning to work. While there’s still quite a bit of uncertainty about the economy’s trajectory, the initial turmoil appears to have stabilized and there are signs of the beginning of a recovery.
After experiencing the roller coaster-like ups and downs of the markets these past few months, investors and sponsors alike are understandably cautious about where to invest. Although the market for multifamily as a whole has not yet seen the price dislocation caused by the financial fallout at the levels that were previously anticipated, some markets will, of course, fare better than others. The question is, what factors contribute to a strong market for multifamily real estate investments?
Real estate professionals examine a range of factors to decide the potential strength of a market when underwriting a subject property. While there is no magic formula as to what factors will definitively determine a strong market, the presence of certain fundamentals, such as population and job growth, and the historical performance of the market during and after previous recessions, are strong indicators of a healthy market. Below, we take a look at some of these factors.
Job and income growth
Job and income growth are signs that the local market’s economy is flourishing. Strong job growth is especially important when selecting strong markets for multifamily real estate investments, because ultimately people require an income to meet their financial obligations, such as rent. Moreover, if the wages in the market are growing at a robust pace, that improves the likelihood that tenants will be able to afford increasing rents.
For there to be job growth, a market must have an attractive environment for business. What is considered attractive can vary from market to market and industry to industry, but can include tax-friendly policies, state grants and financial incentives that lure businesses to the area. Additionally, a large source of college graduates, creating a stream of well-educated, skilled young laborers, can also attract industries to an area, which can lead to job growth.
A growing population is a positive sign when evaluating a market, because it indicates there is strong demand to live in that area. Additionally, an increasing population means there will be a larger tenant pool, making it easier for a landlord to find renters — as long as the supply of new residential units doesn’t outweigh the demand.
If a market has strong job growth, its overall population is probably increasing as well, since good jobs tend to attract people. The population could also increase for a number of other reasons aside from job growth, including the area’s affordability or its quality of life. For example, currently both jobs and people are increasingly moving from high-cost cities to alternatives with lower costs of living and doing business.
Historical strength of the market during and after recessions
Multifamily has outperformed other asset classes during and after downturns. This does not mean that the multifamily sector was immune from economic challenges in prior recessions. However, certain markets fared better than others during downturns and rebounded quicker as the economy improved, and it’s important to take a closer look at these resilient markets. While every recession has its own unique causes and challenges, there is some comfort in knowing that a certain market outperformed national statistics during a downturn and has subsequently rebounded faster or stronger, so long as that market continues to exhibit strong fundamentals today.
Throughout U.S. history, the economy has survived various periods of financial disruption and regained strength. That scenario is likely replaying now as it rebounds from the effects of the COVID-19 pandemic. As with every recovery period, there are likely to be opportunities for real estate investors. By following market factors, such as job and population growth, and economic resiliency, it may be possible to identify strong markets for multifamily real estate investments.
At ArborCrowd, we never stopped evaluating deals even in the midst of COVID-19. As we look toward launching future deals to our investors, we will continue to look at markets that exhibit strong fundamentals, and remain ready to capitalize on opportunities as the country fully reopens and the economy begins the recovery phase.