By Roger Daniel, president and founder, DMG Capital
As we head towards the halfway point in 2023, the only thing certain in the economy is the uncertainty. With the volatile stock market, rising inflation, fragile job market and disruptive geopolitical landscape – many traditional investment opportunities are impacted. Apartments have historically served as a good hedge during tougher economic times and perform well in an inflationary market.
- Strong Multifamily Demand: Homeowners across the US are beginning to look to downsize, often looking to lessen the hassles of home ownership. Simultaneously, millennials are forming their own households/ moving out of shared apartments and Gen Zers are looking to leave their childhood homes. All of this is resulting in increased demand for apartments in urban and suburban areas.
- Constrained Apartment Supply: While the demand is increasing, the apartment supply is being constrained by rising construction costs and higher interest rates. With less new development and many people prioritizing the benefits of renting over buying – multifamily continues to deliver valued product for residents and investors.
- Rent Growth Outweighs Expenses: Apartment owners are being impacted by expense increases from labor, to taxes, to insurance. However, effective apartment operators and property managers are already anticipating these expense increases and are mitigating them where possible. Historically apartment operating expenses are only a fraction of income so that corresponding increases in income will outweigh the expense increases over time.
This supply/demand dynamic is not resolvable quickly. Those homeowners interested in downsizing represent an enormous segment of the population. New developments take time to build and creating enough apartment supply to satisfy demand is years away. As an industry, we anticipate seeing sustained income growth and value creation in the apartment sector for the foreseeable future.