By Arbor Realty Trust
Inflationary environments set many investors’ minds to thinking about multifamily properties, which have tended to perform as well or better than other property types in the face of economic headwinds. Product type is no guarantee of success, however, and careful site selection is essential to ensure a project will have the renter demand and pricing power the owner needs to succeed.
Arbor Realty Trust, in partnership with Chandan Economics, developed the opportunity matrix featured in Arbor’s Top Opportunities in Large Multifamily Investment Report 2022. The opportunity matrix helps clients navigate the nation’s apartment markets, enabling them to compare relative strengths from one metro to the next and identify those offering the greatest potential for development or investment. Its ranking system, which analyzes eight key categories, found the top three U.S. metro markets for large multifamily investment in 2022 are San Antonio, Kansas City and Las Vegas.
“Reviewing what made these communities rise to the top of our 50-metro ranking will demonstrate how investors can use the matrix to compare the climates of opportunity in the markets in which they operate, or to suggest new fields of opportunity for their next venture,” said Matt Maison, vice president of research for Arbor Realty Trust.
Views from Many Angles
Each year, the Arbor-Chandan Opportunity Matrix examines the major U.S. markets using factors an investor would consider in market selection for a large multifamily project, meaning those with 50 or more units and a valuation exceeding $20 million. Recurrent criteria include large multifamily lending, which serves as a proxy for the availability of debt financing, labor performance indicators, population growth, renter demographics, renter migration and the balance of multifamily supply and demand.
The 2022 matrix pays specific attention to how well metro-level economies have maintained strength during the past year and how markets stand to benefit from continued labor and housing market shifts. Additional categories in the 2022 study looked at two national trends that have moved to the fore: “Work from Home Importers” gaged the degree to which markets are attracting remote workers from elsewhere. The second addition, “Mean Reversion,” is a control to account for 2021’s rapid increase in residential asset values and each market’s risk of a price correction.
All eight categories received equal weighting. In categories with more than one variable, each variable was weighted equally. Renter migration, for example, factored in the percentage of apartment searchers that planned to remain in a market versus the share of searchers from elsewhere, as well as the costs of housing and of consumer goods. The demographics category looked at household rentership rates and household incomes; the labor category touched on levels and one-year changes in employment, unemployment and wages. The matrix tracks 21 variables in all.
Of the three western markets topping the overall ranking in 2022, San Antonio stood out, performing well across the board. The home of the Alamo is entering an expansion phase fueled by a well-rounded set of fundamentals.
With a firmly established tourism sector and military presence, the metro’s diverse economy features a rapidly growing financial services sector, expanding high-tech employment and a stake in petrochemicals and other industries. Of primary interest to investors, San Antonio has one of the nation’s largest multifamily supply gaps as construction lags the inflow of new residents seeking rental housing.
Kansas City leaped to the No. 2 spot after ranking 29 out of 50 the previous year, benefiting from strong in-migration of remote workers in the technology sector who were shifting away from more expensive cities. Key drivers behind the Missouri city’s new prominence in the rankings include the fourth-largest multifamily lending volume and the tenth most affordable housing costs. Las Vegas, which held the top slot in 2021’s rankings, remains in the top three due largely to its affordability and success in attracting remote workers.
“The three top metros by overall score share some commonalities that investors will find in other cities benefiting from strong demand for rental housing and affordability,” according to Maison. “Indeed, over the past two years the country has experienced a flight to affordability, with populations and employers relocating from both coasts and other expensive markets to settle in affordable communities along the Sunbelt.”
Investors may find similar disparities to exploit within a single region. For example, Austin’s median rent and year-over-year rent growth are among the highest in the country, so cost-conscious renters moving to Central Texas may gravitate to San Antonio, where their dollars stretch further. Similar logic drove many San Francisco residents to Seattle and then drove Seattle residents to Portland. Now rent growth and rising costs are factoring into the growth of additional, relatively affordable markets in the region, such as Boise.
Using the Matrix
Multifamily developers and investors can use the Arbor-Chandan Opportunity Matrix to explore affordability and additional trends, such as supply growth. Just as affordable markets have welcomed more renters, they have also seen more multifamily construction starts, which could temper the opportunities for development in some cities. In general, however, new supply delivery has been restrained by a host of construction challenges ranging from supply chain breakdowns to labor shortages and building material cost volatility. As a result, housing demand remains high in many metros and any new supply is being snapped up rapidly, particularly in relatively affordable markets.
“Investors can also evaluate the market exposure of their portfolios to the markets offering the greatest multifamily opportunities, or to identify which investments are in markets the matrix identifies as having heightened risk for price correction,” Maison said. “An investor looking to expand their footprint could use the matrix to supplement their exploration of other markets and potential acquisitions and developments.”
Given today’s still-heated inflation and the Federal Reserve’s ongoing monetary tightening, multifamily investors need to use all the tools at their disposal in forming their strategy for the months and years ahead. The opportunity matrix can help to clarify which markets are likely to remain balanced in the headwinds and tailwinds buffeting the sector, and where multifamily assets can fulfill their unique potential to capture rental housing demand that is increasing along with the rising cost of homeownership.