Commercial real estate values have soared over the past two years, with most property sectors climbing past pre covid values by over 14%, according to Green Street’s Commercial Property Price Index (CPPI). The recent strength in the real estate market can be attributed to several factors, including the long period of extremely low interest rates and a large number of investors that began turning to real estate as a way to hedge against inflation.
Multifamily real estate has performed especially well because of the major housing shortage and collapse in affordability. The increase in average rents far outpaced inflation across the country because of the growing demand for rental units, which lead to greater net operating income and high appreciation for most multifamily assets.
With little reason to expect the demand for rentals to slow down anytime in the next several years, multifamily properties continue to be an attractive asset class for investors.
A problem heard around the industry is the lack of availability of quality properties that can be acquired at a price that will offer enticing returns.
The greatest opportunities in the multifamily space appear to be in development projects. Rent growth and appreciation both outpaced the increase in construction costs in 2021, which are up 17.5%, the highest in 50 years. This gives developers the ability to construct a superior product in the market while being able to offer competitive rental rates.
One nationally renowned developer currently has three projects in its pipeline, in markets with growing demand, that are expected to provide a significantly higher cap rate than what could be obtained by purchasing an inferior property. Projects like this can result in higher cash flow and greater upside for investors.
Of course, opportunities for this type of investment are becoming extremely limited since development sites in prime locations are increasingly hard to come by. Many speculate that these market conditions will push future valuations even higher.
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