Is owning multifamily worth it?
Not anymore. This is what Rubin has heard “‘My clients only do multifamily, so they’re fine’. Well, no. That’s not the case. That’s not the case at all. There are definitely some risks in multifamily as well, and I’m not sure the investors – especially the retail investors, in limited partners in these deals who bought probably for income – recognize the current environment if they’re not real estate professionals. They don’t know what’s going on.”
To be sure, such investments are just as vulnerable in today’s volatile market, he said. What makes them more vulnerable? “Two things,” Rubin said. “One, the fundamentals, meaning supply and demand, are not quite as they were before and the more important reason – the debt market changes. If you think about the fundamentals side, we had tremendous rent growth in multifamily during the pandemic and the properties were cash-flowing and some people felt that was going to continue indefinitely, which was, of course, impossible because there was too much rent growth. And so what you had was some of these markets where people were moving to because they were more affordable – over the last three years, rents are up 50%, and they’re no longer affordable.”
Such as it is with nature finding a way, so does the invisible hand of the market: “All the statistics are showing rent growth is coming down to historically normal levels – 2% to 3% a year maybe, not 10%, 13%, 20%, 25% in some markets. And in some markets that had significant growth, we’re really seeing rents decline now. Of course, the other piece of the puzzle is that, for many years, there wasn’t a lot of construction of new units in multifamily. But over the last few years, it’s really ramped up. There’s always an imbalance, right? Before you had too few, now you have too many.”
Rubin knows of what he speaks, with more than 35 years of experience across the real estate industry offering a wide expertise on the breadth of the industry – from family-owned business, REITs, PE funds and financial institutions, to improving governance, transparency reporting and succession planning for high net worth individuals.
Given all that he’s seen in his storied career, Rubin doesn’t mince words in his most recent paper, in which he further advises would-be investors: “If it comes as any consolation, the current threat to property values and yields was not the industry’s doing but rather the result of shifts in the economy and the capital markets,” he wrote. ”Supply and demand are relatively in balance and most property sectors have been generating generous returns for their investors. But as rental growth slows from the almost absurd rates seen in the last few years, and inflation pushes up wages and other operating costs, property cash flows are likely to be squeezed. In combination with a higher cost of capital, that means falling asset values. Some reports are saying we are not in a downturn but a return to normal conditions. That’s wrong and right. We are returning to historically normal conditions in terms of higher rates and improved wage inflation, but this new reality will cause values to fall and, having been through quite a few, I call that a downturn in the cycle.”