Michael H. Zaransky is Founder and Managing Principal of MZ Capital Partners, an award-winning multifamily investment and development firm.
Consumers have been catching some relief lately from inflation, or, at least, they’re feeling its pull less acutely. Since June 2022, when the year-over-year consumer price index peaked and increased 9.1%, inflation has begun to normalize—with caveats, of course.
According to the U.S. Bureau of Labor Statistics, the consumer price index rose 0.3% in April, remained unchanged in May and declined by 0.1% in June. Despite these fluctuations, inflation has remained below 4% since June 2023. Perhaps the U.S. economy is moving closer to the Federal Reserve’s target inflation rate of 2%.
Still, inflation continues to bite at one of the largest consumer expenditures: housing. The shelter index, which measures the costs of housing, was 5.2% higher in June than at the same time in 2023. That index rise contributed almost 70% of the all-cost inflation rise, excluding the food and energy index, according to the BLS. So even as inflation begins flattening elsewhere, it continues to impact housing, including the multifamily market.
Sounds problematic, right? Not entirely. While no sector is truly inflation-proof, as the founder of a multifamily development and investment firm, I’ve found that multifamily housing tends to be resilient. It’s a tangible asset built to sustain a variety of economic conditions.
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How Multifamily Housing Responds To Inflation
Many investors understand that inflation can be a net positive for the multifamily housing sector. As Veena Jetti, founder of a multifamily investment firm, wrote in a Forbes article in July 2022, “I’ve found higher inflation and interest rates work in favor of multifamily.” At its most basic, here’s why.
When prices of goods and services rise, many consumers put off long-term purchases, such as homes. But consumers require that roof, so they rent. That drives demand for apartments, single-family rentals and other multifamily properties. Increased demand raises occupancy and generates higher rental rates, cash flow and property values. This has been the case for decades.
Real Estate Witch said rents have increased 208% since 1985, while inflation has risen 149%. From 1985 to 2001, rents outpaced inflation by 40%, the report further noted. I’ve found that rents and inflation often run together, a trend that multifamily housing continues to illustrate.
We noted earlier that U.S. inflation reached its recent peak in June 2022. That same month, the median rent in the nation’s 50 largest metropolitan areas was $1,876, which was 14.1% higher than in June 2021, according to Realtor.com.
As Jetti noted, inflation and rising interest rates impact real estate in tandem. Prospective homebuyers remain stymied by “stubbornly high mortgage rates,” according to Realtor.com. Where do many spend the holding pattern? In the rental market.
Considerations Before Choosing Multifamily As An Asset
Inflation affects every investor. Costs rise, buying power falls and money loses value. Multifamily housing can provide an inflationary buffer because it serves economic, cultural and psychological functions in society: People need shelter. But before making this type of investment, consider:
• The rental factor: Rental rates won’t continue the surge increases they saw post-pandemic. Multifamily operators can consider raising rents during inflationary periods to increase income and cash flow. This combination can serve as inflationary protection.
• The appreciation factor: Multifamily housing is a long-term investment. It requires debt (fixed-rate financing is another inflation hedge) and responds better in five- to 10-year forecasts.
• The diversification factor: Portfolios benefit from diverse assets, which multifamily housing can provide. However, multifamily isn't for everyone. It's not a market for short-term surfers. As I previously mentioned, multifamily is a long-term investment. It requires capital, knowledge of submarkets and operational expertise. Multifamily investors willing to study growing job markets, hot salary sectors and population shifts can deliver an edge. Most of all, multifamily investors must be patient by projecting long-term returns on investment over quick-cash opportunities.
Reducing Inflation’s Impact On Multifamily Investments
I'm certainly not suggesting the multifamily housing market bores through inflation like an icebreaker ship. Multifamily operators confront the same rising costs for building materials, labor, insurance and taxes that affect everyone. Per-unit insurance premiums in particular have climbed sharply, as much as 75% over a four-year span from 2018 to 2022, according to Fannie Mae.
Multifamily operators can help mitigate inflation’s impact through cost measures, such as pausing nonessential projects, revisiting vendor deals, shopping for new insurance carriers and perhaps appealing tax assessments. And, though it might sound counterproductive, investment might offer another opportunity. Generally, occupancy rates have been stable. According to RealPage, U.S. occupancy in May 2024 remained above 94% for the seventh consecutive month. Property managers may be able to capitalize on this equilibrium by investing in existing properties.
Renters demand and have proven they will pay premiums for updated properties. Kitchen and bath upgrades, smart-home technology, premium Wi-Fi and experiential features command higher rents. With wages continuing to grow, some renters can afford premium properties at higher rents. In an inflationary market, value matters. Property owners who provide renters with greater value can command higher prices, thus delivering more income and higher occupancy rates to stem inflation’s effects.
The short-term outlook for multifamily housing is mixed. The National Association of Home Builders expects building starts to slow, while Bloomberg called multifamily “the next stress point in commercial real estate” (paywall). Multifamily real estate always has short-term concerns, primarily centered around occupancy and rents. But as a long-term asset, multifamily housing has often shown resilience across economic conditions, including the recent pinch of inflation.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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