The last fifteen or twenty years have witnessed a compression of capitalization rates in the multifamily sector. When I first began appraising in 1990 out in Dallas, the RTC was at full throttle and apartments were hard to give away. That’s when the Federal Government had the bright idea to create LIHTC tax credits, administered by the people in the individual states who saw fit to perpetuate their “temporary” jobs. But I digress.
Overall capitalization rates back then of over 10% for investment grade apartments were not unusual. And these weren’t dumps, mind you. I saw more than one development offering maid service just to attract tenants. Seriously?
In either case, those of us who pay attention to these things have watched overall capitalization rates for the multifamily market decline over time to the point that we wonder, at least I do, how much lower can they go? These days, rates in the 5% and 6% range are not uncommon. While these rates are low, one must remember that investment returns in real estate are comprised of two factors – annual cash flow AND the reversion.
What’s happening behind the scenes is this: Our coddled teenagers , many of whom feel persecuted when their IPhone gets taken away and who wouldn’t recognize a push mower, are taking on more and more debt in college. Fewer and fewer are able to afford home ownership. This characteristic of the millennial generation is one factor fueling demand for multifamily space. And based on this article published on the Appraisal Institute website, many are simply opting out.
Nationally, based on a chart presented at the annual convention of the Appraisal Institute (which I can’t seem to put my hands on right now), the supply and demand for apartment space are near equilibrium. But if a large segment of the up-coming generation opts out of the single family market there could still be plenty of pent-up demand to keep fueling the multifamily fire.