Find Your Next Investment At OZ Pitch Day - July 28
Multifamily is the most popular asset class for Opportunity Zone investors. According to the latest Qualified Opportunity Fund survey data from Novogradac, approximately 80% of all QOFs have exposure to residential real estate.
Scott Hawksworth, co-founder of MultifamilyInvestor.com, joins the show to discuss multifamily real estate investing trends that are unfolding in 2022, how current macroeconomic conditions are affecting investors, and how Opportunity Zone investors are reacting to the asset class.
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- How and why multifamily is the most popular asset class for Opportunity Zone investors.
- Supply and demand trends in multifamily real estate.
- The growth of alternative investing, particularly among retail investors.
- Multifamily cap rate compression, and how it impacts investors.
- How rent rate increases are combatting cap rate compression, and how sustainable such increases may be.
- Why multifamily continues to be a popular asset class for investors, despite economic turmoil brought about by rising interest rates, inflation, supply chain issues, and the war in Ukraine.
Featured On This Episode
- Bullish Opportunity Zones Equity Raising Continues Despite End of Basis Step-Up Benefit (Novogradac)
- U.S. Housing Market Needs 5.5 Million More Units, Says New Report (WSJ)
- Inflation barreled ahead at 8.3% in April from a year ago, remaining near 40-year highs (CNBC)
- Commercial Cap Rates Likely to Keep Compressing in 2022 Despite Higher Interest Rates (NAR)
- The Golden Age Of Multifamily Investing, With James Brunger (MultifamilyInvestor.com)
- Apartment Demand is Normalizing but Rents Likely to Keep Rising in 2022 (NAR)
Today’s Guest: Scott Hawksworth, MultifamilyInvestor.com
- Scott Hawksworth on LinkedIn
- MultifamilyInvestor.com on LinkedIn
- MultifamilyInvestor.com on Twitter
- MultifamilyInvestor.com on YouTube
About The Opportunity Zones Podcast
Hosted by OpportunityDb.com founder Jimmy Atkinson, The Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.
Jimmy: Welcome to The Opportunity Zones Podcast. I’m your host, Jimmy Atkinson. And, by the way, before we get going today, a little announcement about this podcast. We are now a video podcast, and all episodes going forward will be available on our YouTube channel at youtube.com/opportunitydb. So if you’d prefer to watch instead of listen, and we will have some visuals every once in a while on this show going forward, please find us there on YouTube and hit that Subscribe button.
But now on to today’s episode, we’re talking multifamily today. Multifamily is the most popular asset class for Opportunity Zone investors. According to the latest Qualified Opportunity Funds survey data from Novogradac, approximately 80% of all QOFs have some exposure to residential real estate. So clearly, it’s a very important asset class for many Opportunity Zone investors.
On today’s episode, we’ll be turning our attention to broader trends that we’re seeing in the multifamily sector so far in 2022. And here to discuss these trends with me today is my partner at multifamilyinvestor.com, Scott Hawksworth. Scott joins us from Chicago, Illinois. Scott, how are you doing?
And hey, welcome back to the pod.
Scott: Hey, Jimmy. Thanks for having me on again. It’s great to be back.
Jimmy: Always great to be with you, Scott. We talk just about every day, but…
Scott: Pretty much.
Jimmy: …not always on the podcast, so pleasure to get your insights recorded for our audience today. So, Scott, I know you have your eye on four broader macroeconomic multifamily trends in 2022. And just to quickly rattle off those four trends and then we’ll dive into each one specifically, we’re going to be talking about, one, supply and demand trends, two, the growth of alternative investing and where multifamily fits into that broader asset class, three, cap rate compression, and then, four, rent increases.
So Scott, let’s dive in with your number one trend, which is supply and demand. What can you tell us there?
Scott: Sure, Jimmy. So the fact is that when we’re talking about multifamily housing, demand continues to outpace supply. When you look at housing overall, there was an NAR report that says we have underbuilt, and there’s been this housing shortage of underbuilding over 5 million units since 2001. And that is not showing signs of really slowing down.
And when we look at the demand and supply side of things, we’re seeing some shifting trends in the sense that a lot of the demand is moving to the suburbs, out of the cities, concerns about crime, and, you know, the ongoing wake of COVID-19 pandemic restrictions and things like that. A lot of folks are looking to the suburbs, but the fact is that that’s just driving demand up for multifamily housing in those areas.
So when we’re looking at trends, that’s one that just continues.
Jimmy: Yeah. It seems like with respect to cities versus suburbs, it seems like we go through cycles where it becomes very popular to live in the cities, and then it becomes less popular. And then for a while, it was more popular. And now I think we’re finally starting to see the reversal of that trend where we’re seeing a lot of out-migration from cities to suburbs, as you mentioned.
Any other takeaways from supply and demand trends? Any other points to note on the housing shortage that we have in this country?
Scott: Sure. You know, the only other thing I’d say, too, is when we’re talking about locations, the Sunbelt continues to just have a tremendous amount of demand. And, again, when we kind of talk about sort of a lot of the shifting as a result of the pandemic, a lot of folks reevaluating their home life if they’re working from home a lot more, working remotely, and that has also had folks really looking to warmer areas.
I’m in Chicago, and it’s still pretty cold here in May at the time of this recording. So a lot of folks are saying, “Well, can I get that big city salary and maybe move to a place that’s a little sunnier potentially?” And so we’re seeing lots of shifting there really just driving that demand for multifamily. And then I’d also add, lastly, we’ve seen interest rates going up.
We’ve seen a lot of a decline in mortgage applications. So a lot of folks are not actually buying single-family homes, and they still need a place to live. Everybody needs a place to live and that’s where multifamily really is filling a need, and that’s, of course, also driving the demand there.
Jimmy: Yeah, I think we’ll kind of touch on this a little bit more on trend number four when we talk about rent rate increases. But if you can imagine being a first-time homebuyer, so you don’t have a current home that you can sell out of, you’re buying into the market for the first time, prices have skyrocketed for homes just over the last year or so.
I think we’re seeing CPI inflation at, what is it? I think 8.5% was the most recent CPI print?
Scott: Yeah, that was the last print. Yeah.
Jimmy: Housing costs have well exceeded that into the mid to high teens year over year price changes in home buying. So if you don’t already have a home that you can sell out of, and now you’re also seeing mortgage rates start to increase, it has become very costly to buy a new home as a first-time homebuyer. So I think we’re seeing delayed home buying for first-time homebuyers, and that means more people, just a bigger pool of renters, which helps to drive some underlying fundamentals for investing in multifamily properties that are rental properties.
Scott, if we didn’t have anything else to add there, I think we can move on to our second trend that you’re keeping an eye on with respect to multifamily, and that’s kind of a broader trend of growth in alternative investing. What can you tell us there?
Scott: Yeah, I mean, put simply, we are seeing a tremendous amount of investment from sponsors. And they’re continuing to amass more assets in multifamily and Alts, and multifamily, of course, makes a huge portion of that. And that, of course, includes QOFs as well. And in terms of this trend, I think that we’ve seen ongoing inflation like you were just talking about, and a lot of folks are looking for places to place their capital and really hedge against that ongoing inflation.
And multifamily just has a huge role to play in that, so we’re just seeing a ton of interest in that.
Jimmy: Yeah, absolutely. And if I can just kind of add a little bit more context there, and I’m looking at my other screen now and looking up the exact figure here that I had found earlier, but New York Life Investments put out a report toward the end of last year. They project global assets under management in alternatives are projected to grow by 62% from 2020 to 2025.
Clearly, it’s an asset class that has continued to increase in popularity among high net-worth accredited investors, but also among RIAs and other sorts of advisors. It’s always been very popular with institutional investors, large pension funds, large hedge funds, family offices, but now we’re starting to see a lot more Main Street investing interest in alternatives.
And, of course, when we talk about alternatives, we’re talking about stuff that isn’t traded publicly, so stuff that you can’t just put very easily into your brokerage account at Fidelity or TD Ameritrade or Vanguard. We’re not talking about mutual funds, or ETFs, or stocks or bonds, we’re talking about stuff that isn’t traded.
So we’re talking about private REITs, we’re talking about gold. Or other types of alternative assets can include collectibles or art, but by and large, the vast majority of people when they talk about alternative investing, the vast majority of offerings that are out there that are branded as Alts are real estate. And, of course, within real estate, multifamily clearly the most popular sector for real estate investing as a segment of the alternative universe.
And we see that in opportunities on investing as well, as I cited at the top of the show. You know, about 80% of the QOFs out there have a residential component according to the Novogradac data. Unfortunately, they don’t break down residential into single-family versus multifamily versus mixed-use or other types of multifamily…as residential, excuse me, property types.
But anecdotally, I can tell you that the vast majority of deals that I see that are residential are multifamily. Occasionally I’ll see a single-family here and there, but the vast majority are multifamily and other types of multifamily as well, not just apartment buildings. But we also see senior living and student housing are two of the, I guess, subtypes of what could be considered multifamily.
Scott: Right. And to jump in there, Jimmy, as, of course, you know just how resilient real estate and multifamily specifically has been shown to be historically. And so there’s concerns out there about, you know, economic downturn. The stock market has been taking it on the chin here recently. So a lot of folks are looking to, again, those historically resilient sectors, and multifamily is one of those.
Jimmy: Yeah, no, I think that’s a great point. I think people kind of look at their stock portfolio and they see that they might be overweighted in stocks because of the run-up over the last decade-plus, and including just the most recent run-up just since the COVID recovery of about two years ago now is when we experienced that really quick dip and then subsequent rebound, and it’s only gone up from there.
And, as you mentioned, has faltered a little bit here over the past month or so. People are looking for alternatives. I think people are seeing, “Hey, wait a second, why is the stock market so overheated? Maybe I’ve got too many stocks. I’m looking for a hedge against inflation. I’m looking for something that, you know, isn’t publicly traded.” I think that all goes into that trend, the growth of alternative investing, and we’ve discussed how multifamily fits in there.
Well, let’s move on to our third trend that you’re keeping your eye on, Scott, which is cap rate compression and maybe you can talk about cap rate compression trends there and how it impacts an investor. But also maybe you can just kind of backup and define what is cap rate compression exactly, and what effect does it have on a multifamily investment?
Scott: Right. So cap rate compression quite simply is the fact that it’s becoming more and more expensive to acquire a property. And that has had an impact on investors when you’re trying to raise capital and look for those properties. And so a lot of folks have thought, “Well, we’ve had this sort of trend over the last few months here and quarters of this cap rate compressing,” and there’s been a lot of concerns of, “Well, will this continue? Will this make investors shy away? Will this make sponsors shy away from these deals?”
And we just aren’t seeing that, and we’re also seeing that cap rate compression continuing. Actually, NAR had a report across all real estate sectors. They’re seeing that, and, of course, multifamily has a big role to play in that as well. You’re seeing this trend, and it’s not really showing signs of slowing down, again, when you’re looking at inflation.
You’re looking at these market prices kind of going back to that first point, the demand continues to outpace the supply, and that is impacting these cap rates.
Jimmy: That’s great, Scott. Anything else to add about cap rate compression there? Maybe I’ll ask you a question. Do you think we’ll get some decompression at any point soon, or is this trend going to continue for a while? What’s your prediction there?
Scott: My gut says that it’s going to continue. I don’t think that, even with the economic concerns we’ve seen, I just think that the demand is there. And I recently did a podcast where we talked about it being the golden age of multifamily investing, and I just don’t think that it’s really going to slow down.
Jimmy: Yeah, that was a great episode, by the way. We’ll be sure to link to that in the show notes for today’s episode at opportunitydb.com/podcast. Well, let’s move on to our fourth and final trend that you’ve got your eye on for 2022, Scott. Let’s talk about rent increases. What can you tell us there? How do you characterize rental rate increase over the past few months, and do you think it’ll continue?
Scott: Yeah, when we’re talking about multifamily, the rent rate increases have been significant. Actually, NAR, once again, they had a report that came out in February, and rent rates increased by 11%, that you are not… Don’t adjust your TV set.
Yes, 11%. And that’s really, really an incredible amount of rent increases to the level where, when you look at the long term, is that sustainable? No. But when you’re looking at it from a multifamily investing standpoint, really that offers a lot of attractive returns and income for folks. And we are seeing this trend across the United States.
It really doesn’t seem to matter too much what the market is. The fact is, again, it’s kind of driven by that demand there. And we were talking about this earlier about now we have, you know, rising interest rates, the cost of single-family homes continues to rise, so more people are not only wanting to but they’re needing to live in multifamily properties, and they’re paying rent for longer first-time homebuyers.
It’s becoming harder and harder to buy that first home, and so those rent increases are looking to continue, again, maybe not quite at as high of a rate, but that’s what we are seeing.
Jimmy: Okay, so those are the four trends you’ve got your eye on. Let’s put everything together now and zoom out and take a 30,000-foot view. We have had a lot of economic turmoil lately in the capital markets. We have interest rates going up.
We have inflation not reaching any end, it seems. We have a war in Ukraine, which has disrupted a lot of economic marketplaces all over the world. Scott, in light of all of this economic disruption or economic turmoil, market turmoil, are investors still interested in multifamily?
Scott: Absolutely. And I think it goes back to the fact that people need homes, and so it really doesn’t matter much when you kind of look at that high-level view. People are still very interested in multifamily. Now, are there some challenges, supply chain issues when we’re talking about materials, especially if we’re looking at, you know, value add properties and things like that where you want to do some renovations and some improvements?
Yeah, there are challenges there. Do rising interest rates make some of the financing a little more tricky to navigate? Yes, absolutely. These are factors. Is it a little bit more expensive, as we were talking about, to really get in on a property? Absolutely. But in spite of all of that, I kind of go back to those rent increases, that supply and that demand kind of mismatch there, and the fact that we just are not building enough homes that are sorely needed.
So when investors are looking at the multifamily space, I think that they should be and they are still very bullish.
Jimmy: Yeah, well, I don’t disagree with you there. You know, as we’ve seen, at least in the Opportunity Zone industry, we’ve seen only more and more money pour into multifamily over the past several months and years. And actually, that kind of brings me to my next point. I kind of want to do something fun here, Scott, since this is a video podcast. Now, I want to share my screen with the viewers. And if you’re listening to the audio-only version of this, head on over to youtube.com/opportunitydb to watch this podcast episode in video form.
But I want to show everybody our funds directory and how you can use it to find multifamily funds in Opportunity Zones. So I’ve headed over to opportunitydb.com/funds. You can also just hit our website and click Funds up here in the top nav, you scroll down a little bit. These are our featured funds at the top, Urban Catalyst, Caliber, Investors Choice, and Origin Investments.
But if you want to, you can come down here and you actually filter by asset class or property type. We’ll say we want to see property types that focus on a lot of different sectors here, but we’ll check multifamily housing.
Scott: Multifamily housing.
Jimmy: Yeah. And then you can also dial up and down the minimum investment, the fund size, investment locations, but for now, we’ll just see all multifamily. So those filters have now been applied. And you can see we’ve got a pretty good list of multifamily funds that are open and raising capital. If anyone is out there looking to invest in an Opportunity Zone fund that has multifamily exposure, I think this is a pretty darn good place to start.
So just wanted to share that with everybody real quickly here on the video version of the podcast and maybe entice some of our listeners to head over and start watching the video version if they can. Scott, I think that kind of wraps up the episode for today. A pleasure as always talking with you. But before we go, where can our listeners go to learn more about you and your website that’s all about multifamily investing?
Scott: Well, absolutely. You can head on over to multifamilyinvestor.com. And then, of course, we have “The Multifamily Investor Podcast,” which is also a video show. So, you can find us on YouTube. Or if you’re driving around your car or want to just listen to us, we’re on all your major podcasting platforms, your Spotifys, your Apple Podcasts, etc. So please come check us out, and we are going to be always talking multifamily, and exploring trends and so much more with a lot of thought leaders and hearing from a lot of great folks.
Jimmy: Fantastic, Scott. And for our listeners and viewers of today’s episode, we will have show notes available at opportunitydb.com/podcast. And there, you’ll find links to all of the resources that Scott and I discussed on today’s show. And, of course, be sure to subscribe to us on YouTube at youtubetv.com/opportunitydb, or subscribe on your favorite podcast-listening platform to always get the latest episodes.
Scott, thanks again.
Scott: Thanks, Jimmy.