Multifamily real estate has seen its fair share of challenges through the years, but none so drastic as the recent pandemic. In this blog, we discuss how the commercial real estate industry is recovering from economic turmoil, and we share upcoming trends for 2021.
Real estate is a dynamic market. In a stable market, its large potential for exponential growth makes it an excellent source for investment opportunities. But in a volatile environment, it fosters a high risk of loss with sudden events. And once in a while, certain phenomena can drastically change and uproot the industry.
When the COVID-19 pandemic hit, the U.S. economy shrank by 3.5% in 2020, one of the most dramatic economic downturns since the Great Depression. Most industries suffered badly, especially the real estate market.
The pandemic’s stay-at-home order forced the majority of multifamily real estate projects to be put on hold. Seeing the steep decline in demand and the economic upheaval, many investors pulled their funding, causing many businesses that relied on the real estate industry to file for bankruptcy because they didn’t pivot.
However, there could be a light at the end of the tunnel. After a long, difficult year, most Americans are looking forward to receiving the COVID-19 vaccine, and with a better outlook on the pandemic comes the recovery of a hard-hit economy.
So, should you invest in multifamily real estate in 2021?
Despite its tumultuous state in the previous year, the real estate industry is resilient. Now that the economy is gradually making a comeback, multifamily investment is also expected to rise.
Commercial and multifamily lending is already expected to increase by 11% this year, with mortgage bankers set to close $486 billion worth of loans in 2021. With a better prospect for future revenue streams, it’s a great time to invest. In fact, the continuation of low-interest rates in mortgages is a great incentive for investors. Fannie Mae and Freddie Mac are expected to offer sizable capital to support buyers.
If you’re interested in investing, here are the top real estate trends to watch.
2021 multifamily real estate trends
Surge in the Suburban Market
One of the major impacts of an economic recession is the reduced demand in the urban market. Through the years, homebuyers are gradually favoring rural and suburban areas over densely populated cities because of the high cost of urban living. After several waves of the pandemic, the demand skyrocketed. Stay-at-home orders upped the appeal of suburban living for most homebuyers for several reasons.
While we can expect the suburban demand to recover faster in the multifamily sector, there is no indication this is a permanent thing. The real estate market is dynamic and can change due to several factors. But for 2021, the best course of action for investors would be to look into suburban areas.
Continuation of Multifamily Housing Construction
Although the pandemic put a lot of multifamily real estate projects on hold, the demand for them hasn’t been stifled. Since the early 2000s, there has always been a high occupancy rate for multifamily housing.
The National Apartment Association says there needs to be 328,000 new multifamily units every year to keep up with the growing number of tenants. By 2030, it’s expected that multifamily housing will reach 4.6 million units. Even with the pandemic slowing construction, there’s a robust pipeline of multifamily construction projects planned for this year and the multifamily sector is still set on meeting its goals. Debt availability also remains strong as multifamily housing lenders allocate funds for 2021.
Emerging Tech Hubs
Technology is an unsurprisingly thriving industry, and communities that house employees in the industry thrive along with it. Realtor.com has recently identified that the top housing markets poised for growth in 2021 owe their excellent market performance in part to the prevalence of tech-related jobs. With the increased importance of digital communication and technological solutions in 2020, more and more workers are becoming part of the tech field.
Half of these top ten markets have seen strong growth driven by tech salaries, and many of the others are quickly establishing themselves as rising tech hubs. Not only are profits climbing in these hubs, but the desirability of the multifamily market promises tight inventory that won’t remain available for long.
When the world has fully recovered from COVID-19, we can expect accelerated growth in the multifamily real estate market. 2021 is a great time to invest to capitalize on prices that have dropped significantly. It’s also the perfect chance to venture into new investments while opportunities are emerging.
Multifamily investment: Set up your strategy
If you’re considering investing in multifamily real estate this year, it’s a good idea to review your goals. There are plenty of great investment opportunities on the horizon, but don’t be hasty: The ongoing pandemic still brings uncertainties and complications to the market. You’ll need to be cautious making investment decisions.
The best course of action is to crunch the numbers early so you can get a clear understanding if the investment is worthwhile. Here are some tips on creating your multifamily investment strategy:
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- Calculate your operation expenses – Determine how much you can make on a specific multifamily property by calculating the difference between the income and expenses. If you don’t have access to this information, you can use the 50% rule and use half of the estimated income as your estimated expense. This will help you evaluate properties to see if they are worth investing in.
- Estimate cash flow – Once you’ve figured out your net operating income (NOI), estimate your monthly cash flow. You can do this by subtracting the monthly mortgage from the NOI. This cash flow estimate will give you a bigger picture of the investment’s money-making potential.
- Find the cap rate – Calculate your capitalization rate to know how fast you can get a return on your investment. Keep in mind, a higher cap rate does not necessarily mean higher risk and higher returns just as a lower cap rate, on the other hand, doesn’t indicate a lower risk and lower return. What does it mean then?
Apply for multifamily loans
Investing is a tedious process. It’s incredibly challenging to find funding sources with commercial real estate’s strict policies and capital requirements. But what if there was a way to make multifamily financing easier?
MultifamilyDebt.com offers access to a wide array of financing options to investors. Whether you’re looking to build your portfolio or planning to upgrade your multifamily property, we can connect you with loan options to suit your needs. Complete our quick online application and receive offers from our lending partners, or email us at info@multifamilydebt.com if you’d like to learn more about the multifamily lending process.