Authored by Jonathan Needell, President and Chief Investment Officer
February 17, 2022
Supply and demand in the housing market is benefiting the multifamily sector.
Most of us have been aware of the shortage of affordable and single-family housing in the market. Experts say there is a shortfall of almost 7 million rental units available for lower-income families and a single-family home supply shortage of roughly 3.8 million units.
The lack of single-family residences is forcing many people in the U.S. to become renters by default. This is, naturally, helping to better position those who place capital in the multifamily sector. Equally, the dearth of affordable housing is creating demand for this product type, which is helping to increase returns for its investors.
As a firm that invests in both affordable housing and market-rate multifamily housing, Kairos has seen first-hand how strong the demand is in both sectors, and the fundamentals indicate to us that this demand will continue as supply struggles to keep up with demand. Here is how we see this dynamic having a positive impact on the rental market.
- Investors are being driven to affordable housing for its financial potential.
The affordable sector has long been a stable and growing real estate investment category.
As developers lean into luxury apartment development because of its potential for higher rental income and therefore larger profit margins, not many affordable communities are being built. Therefore, inventory naturally remains low even as demand for budget-friendly housing rises, driving the sector’s stability and driving investors to increasingly invest in this type of housing.
With capital allocation to the affordable market on the rise, especially among institutional investors, the sector is slated to become healthier and stronger.
- Investors are discovering affordable housing’s social impact programs.
As supply-and-demand dynamics propel investors toward affordable communities, they are introduced to the social impact of these developments, which encourages continued investment in this sector.
Kairos is attracted to this sector because it provides much-needed homes for people who otherwise would not be able to afford them. In addition, the affordable communities in which we invest offer residents critical programming that helps them further their health and wellness, as well as their financial, social, and educational status. The social programs that we provide at our communities are tailored specifically for each property based on feedback from tenant surveys to position these programs for better outcomes.
As ESG grows increasingly important to investors, placing capital in a sector like affordable housing that furthers these principles is becoming a higher priority for them. And, as the lack of single-family inventory drives up home prices and forces more people into the rental market, the need for these programs is rising as well.
- Growing competition in single-family housing is pricing buyers into the rental market—and also affordable housing.
With so little single-family inventory, the pool of buyers for existing homes on the market is getting quite crowded, forcing prices up and causing more buyers to consider the rental market.
Of course, competition in market-rate multifamily investment is also hot as would be owners move into market rate multifamily. , This then pushes multifamily renters into affordable housing as an alternative category.
As the investment market for both single-family housing and market-rate apartment communities heats up, investors are likely to continue to bet on affordable housing as it is a sector that we believe is typically less volatile and positioned for steadier returns for the long term.
Lack of affordable and single-family housing is causing strong optimism in the rental market. As rising numbers of Americans are compelled to become renters, investors are being driven to affordable housing for its financial potential, its social impact programs, and its more reasonable pricing. These factors position affordable housing for continued growth and profitability in the foreseeable future.
* This content is meant for informational purposes only and should not be construed as a recommendation, an offer of services, or an offer to sell, or solicitation of an offer to buy a particular security or investment strategy. There are no guarantees that any specific investment strategy will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. The views and opinions expressed in this article are solely my own.
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