Multifamily Continues to Outperform Other Commercial Asset Classes

Multifamily Continues to Outperform Other Commercial Asset Classes

Multifamily investments continue to outperform other commercial property classes, according to the National Multi Housing Council. Even considering the current explosion of apartment development across many areas of the U.S., this trend can be expected to continue. A recently released NMHC white paper, “Explaining the Puzzle of High Apartment Returns,” provides analytical insight. And while not making any definitive predictions, the reasoning in the report makes a strong case for continued strong performance by this sector of the market.

Over the last three decades, apartments have become a much-sought-after investment, exceeding expectations in market trends, such as metro area size, growth rate, geographic region, either on a risk-adjusted or unadjusted basis. In the white paper, released in February 2018, the NMHC Research Foundation analyzed data displaying how apartments have consistently created returns for investors.

What the Data Shows

Apartment property income has continued to grow over the 30-year period from 1987 to 2016, producing returns approaching double digits in some regions.

Due to the compression of cap rates, increases in property values are at all-time highs. Property cap rates have fallen below 5 percent across all property types, indicating that investors are willing to pay more for each dollar of income generated from property assets, explained NMHC’s white paper.

Among the myriad stats provided in the paper:

• Comparison of holding period returns by property types (apartment, industrial, office and retail) for holding periods of one, three, five, seven, 10 and 15 years.
• Regional property comparison for the same variables
• Holding periods by tier
• Holding period returns by income and capital appreciation

A tiered system was created to compare “large employment/high employment growth markets (arguably low cap rate markets) with low employment/slow employment growth markets (arguably high cap rate markets).” Some in the market look toward expected employment growth to better understand how the market will grow in a particular area. With larger corporations moving about, such as Amazon’s HQ2, employment rates grow.


As the authors note in the white paper’s summary:

“The results (of the analyses) are highly consistent across a range of property holding period analyses, different geographic regions, and employment size/growth tiers. The difference between apartment returns and the other types is sizeable, significant, and economically important.”

NMHC also looked at various important financial, capital market, and space market attributes that impact holding period returns, in order to assess whether investors could achieve higher returns by timing their transactions, both buying and selling.

“We find that acquiring/selling properties immediately after a downturn provides excess/lower property holding period returns. The results reveal that a significant portion of ex-post holding period returns can be predicted by the ex-ante economic and real estate market attributes.”

To read the full report, click here.