Beyond multifamily: Though the apartment sector has performed big, there are often overlooked housing sectors that investors would do well to add to the mix
- September 1, 2023: Vol. 10, Number 8

Beyond multifamily: Though the apartment sector has performed big, there are often overlooked housing sectors that investors would do well to add to the mix

by David Rose, Colleen Keating and Brian Sunday

Investors have been plowing billions into U.S. multifamily housing for years running — $648 billion during 2021-2022 alone, according to MSCI Real Assets — and for good reason: The returns have been good if not lavish.

But the housing market has changed significantly in recent years. The COVID-19 pandemic displaced many and accelerated the trend toward home-based remote work. Home prices have increased sharply and become more competitive. Mortgage rates have risen.

None of that necessarily points to diminished performance by apartments, but it does suggest unpredictability, which in turn suggests diversification within the housing sector is advisable. The question isn’t so much whether housing — taken as a whole — will perform, the question is which housing sectors will do best. Given the uncertainty, some would argue housing investors need to think beyond multifamily and diversify their housing commitments with positions in sectors including student housing, single-family rentals, and senior housing developments.

The rationale for each is compelling, as articulated by experts in each of those niche sectors. We asked David Rose of CA Student Living, Colleen Keating of FirstKey Homes, and Brian Sunday of AEW Private Equity to explain why each of their areas of operation meet investor criteria and are worthy commitments in addition to multifamily. Here is what they had to say.


David Rose, CIO of CA Student Living on student housing.

Overlooked by institutional investors for many years, student housing now finds itself matriculating into portfolios as an appealing component within the broader residential sector. The student segment shares similar demand and return characteristics to the widely owned multifamily but with some diversifying benefits as well.

One similarity is the annual leasing cycle that allows for capture of rental growth and inflationary lift on a real-time basis. This dynamic has led to relative outperformance within a diversified portfolio, over the past year, as rent and NOI growth has been able to largely offset the effects of expanding valuation metrics.

Student housing differentiates itself through consistency of performance over a full cycle with its tie to education, which has shown to be less sensitive to the overall economy. Additionally, the sector has rewarded investors with additional yield compared to multifamily, which nearly all institutions have exposure to.

Increased transaction volume is the product of student housing’s journey down the “institutionalization” path. At more than $24 billion, 2022 set a new high watermark for transaction volume with a solid mix of individual transactions along with Blackstone's acquisition of the largest bed owner in American Campus Communities. That transaction alone has attracted even more interest to student housing as investors thoughtfully consider legacy sector exposures with an eye toward goal-based portfolio construction going forward.

Some investors are surprised to find out that student housing can be financed through the agencies (Fannie Mae and Freddie Mac), thus enjoying the similar cost of capital advantage that multifamily commands over the other traditional core sectors (office, industrial and retail).

In contrast to multifamily, annual new deliveries in student housing have been trending downward for a decade. At approximately 30,000 beds per year in 2021, 2022 (also projected for 2023 and 2024), student housing has been delivering about half of the level of new supply compared with the peak years (2013 and 2014) when more than 60,000 beds came online. Tighter supply is accruing to the benefit of existing owners to command pricing power, and it’s one of the reasons major institutions are trying to build scale through acquisitions.

From a strategy standpoint, colleges and universities with diversified revenue streams beyond tuition alone (academic research funding and athletic programs) are seeing the best enrollment growth and have become the focus for institutional investment for housing needs.

Purpose-built student housing has only been around as an asset class since the 1990s. So, it’s not much older than a college student itself. But in that time, it has gone to the head of the class with sustained performance through cycles, excellent recent performance and booming investor interest. It’s time to put a cap and gown on it. Student housing has passed its tests with flying colors, graduated with honors, and is looking confidently ahead to a long and rewarding future.


Colleen Keating, CEO of FirstKey Homes, on single-family rentals

As the U.S. grapples with an escalating housing shortage, single-family rental companies emerge as part of the solution. The challenges facing housing are a confluence of many factors.

First, record low housing inventory is a significant contributor, attributable to decades of insufficient building, a construction pause during the pandemic, increased cost of construction, restrictive zoning, land use ordinances, a skilled labor shortage and delayed permitting processes. According to several reports, the United States is between 4 million and 6 million homes short, with the number of household formations continuing to outpace the number of housing builds.

Additionally, higher interest rates discourage new construction of single-family homes and keep sellers and buyers on the sidelines. For example, the U.S. housing market is experiencing an extreme “mortgage vapor lock,” with 82 percent, 62 percent, and 23.5 percent of homeowners having interest rates below 5 percent, 4 percent, and 3 percent, respectively. Simply put, people are unwilling to give up their low mortgage rates for higher-priced homes at double to triple the finance costs. With the vast majority of mortgage loans held by homeowners being low compared with today’s interest rates, coupled with the 38 percent of homes free of mortgages, more existing homes than ever are parked on the sidelines, further exacerbating the housing shortage.

Migration from high-cost to low-cost states and the dramatic rise in remote and hybrid workers have also affected housing supply and demand. Thirty-six million people are estimated to be working remotely or hybrid in the coming years, a staggering 417 percent increase from pre-pandemic levels. These workers will drive higher demand for single-family rentals as they seek options outside multifamily and homeownership.

Now in their 30s and early 40s, millennials are massively entering the housing market. They are shifting from apartments or their parents’ homes, now requiring their own family-oriented housing. Contrarily, many seniors, who previously downsized, are choosing to “age in place” today, further limiting housing availability.

Amidst these multifaceted dynamics, single-family rental companies play a role in being part of the solution. These companies provide much-needed alternatives to traditional homeownership. Importantly, single-family rentals provide invaluable access to affordable, safe and well-maintained homes in good communities and school systems that might not be available if home ownership is the sole entry price. Furthermore, single-family rental companies invest significant capital in renovations and have robust maintenance protocols to deliver a high-quality resident experience. Simply put, SFR provides exceptional value amid a challenging/evolving economic environment — specifically, less density, more space and privacy, and often lower rent per square foot than multifamily units in the same geography. Moreover, single-family rental homes provide flexibility, which is crucial for our ever-growing mobile society.

Another critical approach single-family rental companies implement is investing in build-to-rent (BTR) communities, providing incremental housing that addresses the housing shortage in a small way. With forecasts pointing toward BTR growing from 100,000 new units in 2021 to 180,000 units per year in 2025, single-family rental companies seek to be valuable players in this space, further expanding housing, housing options and, more importantly, accessibility.

Furthermore, renting a single-family rental home is often a financially more viable option for many in this challenging and evolving economic environment; when factoring in principal, interest, taxes, insurance, repairs and maintenance, renting a single-family home can be hundreds of dollars less costly every month when compared to buying.

Housing will always be in demand, and with the shortage of housing to remain an unfortunate reality for decades to come, SFR companies stand as a beacon of adaptability and resourcefulness in the service of being a part of the overall housing solution. This includes enhancing the housing supply by renovating existing properties and transforming them into desirable homes, having the added benefit of invigorating neighborhoods and increasing local property values. SFR companies also offer a financially feasible and flexible housing option. By investing in build-to-rent communities, they are directly contributing to the increase in housing availability. Embracing SFR homes, supporting the growth of SFR companies, and fostering collaborative efforts can play a pivotal role in navigating the complex challenges of the housing shortage. The shortage is unquestionably real, and we can make strides toward resolving it with a multi-pronged housing approach that includes SFR to meet the diverse needs of everyone today and tomorrow.


Brian Sunday, managing director and senior portfolio manager, AEW Private Equity, on senior housing.

The senior housing industry was hard hit by the COVID-19 pandemic. With an already vulnerable population that suffered great losses, senior housing was severely impacted on multiple fronts from intake restrictions of new residents to labor shortages. Occupancies experienced a decline of roughly 1,000 basis points (2020-2021), followed by an increase of 15 percent to 20 percent in operating expenses driven by labor shortages and mounting wage pressure.

Today, senior housing is on the cusp of an emerging, cyclical recovery. Activity over the past 12 to 18 months is gaining impressive traction, to set the stage for a future where the fundamentals of this property sector may rival the strength of when the industry first took hold following the global financial crisis.

Beginning in the third quarter of 2021, just after the vaccine rollout, the industry experienced eight consecutive months of positive absorption, running at just under 6 percent of total inventory. Pre-COVID absorption was running at just under 3 percent of total inventory.

With baby boomers getting close to 80-years-old, the 80-plus age cohort is forecasted to grow annually by 4.8 percent on average in the second half of this decade. Looking at it another way, from 2022-2023, the U.S. population growth is expected to be 21.6 million, with those 80-plus comprising 7.4 million or 34 percent of that growth. If the retiree cohort ages 65-74 is included, that is another 3.8 million of population growth. On the other side, the primary caregivers (those aged 45-64) are expected to decrease by 174,000, creating an even greater need for senior housing.

On the supply side, the pipeline of projects currently under construction continues to unwind, having fallen to less than 5 percent of existing inventory. Construction starts have been trending downward rapidly, hitting just below 2 percent of total inventory during first quarter 2023, down from a peak of 4.5 percent in 2018. With construction costs elevated, higher interest rates and limited construction debt and equity, construction will trend even lower for some time.

Within the past year, facilities have seen impressive rent growth, with an industrywide average exceeding 5 percent as of first quarter 2023.

Operationally, labor pressures are easing as availability of workers improves and wages stabilize. Assisted living employment has regained previous peaks and wage growth is trending downward. We should expect to see some continued expense challenges in the near term but vast improvements over the previous two years.

Undoubtedly, the past three years have posed significant challenges for senior housing operators and owners. The combination of escalating interest rates and constrained liquidity has resulted in distressed capital stacks, weary owners, as well as actually troubled assets, which should be underwritten with intense scrutiny and a very high bar. However, amidst the distress, there are opportunities for resilient and seasoned sponsors.  The underlying fundamentals we are seeing today should drive demand and boost occupancy, while the supply pipeline should continue to benefit rents and promote revenue growth.

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