Over the past few years, multifamily has been the favoured asset class amongst real estate investors due to its strong performance compared to the other asset classes. The strength in any asset class can be determined by assessing both its ability to make profit and its risk. An asset class that produces good returns at a low risk level, can be said to be a strong asset class.
The most effective way to measure the strength in a multifamily market is by looking at a rent growth rate in order to determine profitability, and evaluate occupancy rate as a measure of risk. A strong, stable multifamily market is likely to show high yearly rent increases of above 3% and occupancy rates of above 95%.
Based on this, it is clear that the national multifamily market has been solid in recent times. Since 2012, multifamily has seen yearly rent growth rates of above 3% while occupancy rates have not declined below 94%. These impressive rates have been continuously higher than that of the other major asset classes.
The Multifamily’s success over the last few years has prompted a large spike in new multifamily upstarts as developers look to capitalize on the huge demand for rental apartments. The last six years have seen increases of multifamily construction year after year throughout the nation.
However, in some cities the huge numbers of new multifamily development projects have massively overshot the market, causing supply to heavily exceed demand. This has greatly decreased the occupancy rates for these cities which has in turn caused rent prices to drop as owners try desperately to fill their vacancies.
One such city, that in some ways has become a victim of its own success, is Houston, TX. The strength of the apartment market in Houston prompted investors to develop record numbers of new apartment blocks in 2016. This has caused a massive over supply of class A luxury apartments, specifically in the downtown area, driving rent prices straight down.