Why Invest in Apartments Now?

All signs are pointing to an improving apartment market. Interest rates are falling. Apartment values have bottomed. Demand for apartment units is strong. And the historic wave of new apartment supply is about to fall off a cliff, causing another runup in rents. This is why we purchased 27TwentySeven Apartments in Dallas earlier this year. It’s why we have an investment fund structured to take advantage of these opportunities. Here are five reasons why you should consider investing in apartments now.

1. Stock market is at all-time highs

The S&P 500 closed at an all-time high of 5,762.48 on September 30th. Over the past year, it feels like a new high was achieved every other week. Stock valuations appear full. Volatility seems elevated. Investment returns are concentrated in a handful of stocks (Nvidia, Meta, Apple, etc.). Since the most recent low in September 2022, the S&P 500 is up 60%. Year-to-date it has gained approximately 20%. It can certainly go higher from here, and I hope it does. However, now is a good time to explore alternatives. Especially ones that haven’t had the same level of rebound, like real estate.

2. Declining interest rates

The Fed cut their benchmark rate by 0.50% (50 basis points) in mid-September. While this by itself doesn’t do much for real estate, the direction is important. The market preempted the Fed’s decision and started lowering interest rates across the yield curve. Lower interest rates do three things for real estate. First, they lower borrowing costs. In September 2023, interest rates to purchase an apartment building were around 6%. Today, that same loan costs around 5%. That’s a big drop. Second, with borrowing costs lower, investors can pay more for the same property. Asset values rise. Real estate values are slow to adjust and getting in now can pay great dividends. Third, it becomes a great alternative to cash. 5-percent money market accounts are a thing of the past. They’re headed towards 3% in 2025 if the Fed stays on its rate cutting path. The math is improving for real estate, and it makes sense to start planning now where to allocate excess cash.

3. Apartment values have bottomed

According to RealPage, apartment values hit a bottom in Q2 of this year. The average dollar per unit of buildings sold was $207,623, only $97 dollars per unit below Q1. If you don’t believe that’s the bottom, transaction volume is a great indicator. Historically, the low in transaction volume represents the low in values. If there’s little demand to buy apartments, then the price must be low enough to entice someone to do so. The low in transaction volume happened in Q1 this year at $96 billion. If you don’t believe RealPage, then Green Street has a chart for you. Their index shows multifamily values hit a low in November 2023 and has since appreciated 13% through August 2024. If you’re still not on board, take the big investors’ word for it. Blackstone is buying the public apartment REIT, AIR Communities for $10 billion. KKR is buying $2.1 billion of apartments from Lennar. The largest apartment investors are signaling that now is a good time to buy. As more capital wakes up from its slumber and interest rates fall, values will rise once again for apartments.

4. Strong demand for apartment units

Aside from declining interest rates, there are other tailwinds for apartments. Home ownership continues to be out of reach for many. Home prices have increased 80% since 2006, even when considering a 30% drop during the Great Financial Crisis. If home ownership is too expensive, people must remain renters. An influx of immigrants has also increased apartment demand in certain markets. The last 12 months as of Q2 saw 390k apartment units leased. That is the third highest level of absorption since 2000, excluding the post-pandemic rush. And it’s only 10,000 units off the high. Demand is strong. Apartments have been resilient.

5. Rents will re-accelerate in 2025 and beyond

Currently, many markets across the country are experiencing record levels of new apartment supply. This has caused rents to fall or remain flat. In a higher rate regime with near-term rent uncertainty, developers stopped permitting new projects. We are about to go from a position of over-supply (today) to under-supply (2025+). With strong demand, and new supply falling considerably, rents are positioned to soar once again. Data providers like RealPage see key Calvera markets like Dallas averaging close to 4% in annual rent growth. Other Calvera target markets like Phoenix, Raleigh/Durham, and Charlotte are also expected to outperform the broader US.

All of this is well known in the industry, yet average investors haven’t started buying based on it. They need proof. They’re waiting for more data. As they wait, those who believe in the data will be rewarded. Blackstone and KKR have jumped back in. Regional owners are betting on markets like Minneapolis and Phoenix in big ways. Even we purchased two deals in Dallas-Fort Worth over the past 12 months. We expect to see improved rent growth and believe that increased capital flows and lower interest rates will push apartment values higher. The time to get in is now. Not once the rest of the market has woken up to these facts.