The Case for Multifamily

Commercial real estate (CRE) has long captured the attention of investors interested in diversifying beyond stocks and bonds, tapping into alternative sources of income and growth, and establishing a hedge against inflation¹. Within the broader category of CRE are five sectors—office, retail, industrial, hospitality (hotels), and multifamily (including traditional multifamily apartments, student housing, single-family rentals and senior housing)—each with its own risk/reward characteristics and growth drivers.

At Forum, we have witnessed enough opportunity over the years in the traditional multifamily sector to merit our exclusive focus. Since our founding in 2007, we have been pleased to see growing interest among wealth managers in multifamily investments for client portfolios.

What makes multifamily different?

The multifamily sector offers several qualities that can be useful in both constructing client portfolios and managing risk. Multifamily stands apart from other CRE sectors for its:

• Greater tenant density per building. Compared to retail, office and industrial properties, multifamily properties typically have more renters per square foot, creating greater diversification of income streams, which can potentially reduce risk, enhance liquidity, and contribute to higher occupancy rates.
• Designation as an “essential” asset class. Multifamily fills a basic human need for housing, which is not the case for other CRE sectors. As such, multifamily properties have historically experienced steady, ongoing demand, regardless of changes in the economy.
• Shorter lease terms. Tenants of multifamily properties typically have lease terms of a year or less versus longer terms for office, industrial and retail. Shorter leases give multifamily a shorter duration than those categories, and therefore less exposure to interest rate risk. As such, multifamily offers a hedge against inflation since leases can oftentimes be raised to keep pace with rising prices.

One thing to note: While hospitality properties like hotels may have lease terms of as little as one night, the sector is not only non-essential, but also highly sensitive to economic downturns (think the COVID pandemic!).

One challenge of portfolio construction involves finding investments that work together to balance a client’s need for growth with their tolerance for risk. The multifamily sector can be a strong contender in this regard because it provides alternative sources of income and growth that have historically been less affected by changes in the economy. The sector has the potential to enhance the risk-adjusted returns of client portfolios, making it a diversification choice worth considering.

• Find out more about how multifamily investing can play a part in your clients’ needs for income and diversification, here.

¹ Source: CFA Institute; “The Nuts and Bolts of Private Commercial Real Estate (CRE) Investing”, April 7, 2023