Market Insights

Multifamily Real Estate: The Sweet Spot of Risk and Reward

Recent economic headlines on inflation, interest rates, and bank instability have led many individuals to pull back from new investments altogether. As a result of the economic rollercoaster we’ve experienced over the past few years, their focus has shifted primarily toward more stable, “safe” investment options. Investor appetite for risk has shrunk throughout 2023. But opportunistic investors know now is not the time to head to the sidelines.

Historical data shows those who seek out stable investment opportunities like multifamily real estate experience less volatility and greater long-term growth potential — even in uncertain market conditions. For example, looking back at the Great Recession of 2008, multifamily real estate performed well-above other asset classes such as stocks and bonds. During this time, the multifamily sector returned 5.2%, while the S&P 500 index declined by 37% according to According to the National Council of Real Estate Investment Fiduciaries (NCREIF). Also according to NCREIF, during the COVID-19 pandemic in 2021, the multifamily sector returned 18.9%, while the S&P 500 index returned 28.7%. The fact of the matter is multifamily fulfills an essential need for people. Regardless of the state of the economy, people will always need housing. In the paragraphs to follow, we will take a deeper dive into the comparisons of performance among stocks, bonds, and real estate over time starting with volatility over the past 20+ years. 

VOLATILITY COMPARISON 

By comparing annual returns since 2000 across stocks (S&P 500), bonds (Bloomberg Agg.), public real estate trusts (NAREIT), private commercial real estate (NCREIF), and multifamily real estate (CoStar Multifamily), it’s clear that some are more volatile than others. While stocks and publicly traded REITs do boast some of the highest historical highs, they also experienced the most extreme losses during the Great Recession and saw significant volatility throughout the past 20+ years.  You can see the sharp highs and lows of stocks (S&P 500) and publicly traded REITs (NAREIT); both stocks and REITs are traded on public exchanges and are sensitive to economic conditions. When the economy is doing well, both stocks and REITs tend to perform well and vice versa. From the graph, you can see bonds (Bloomberg Agg) holding steady throughout — not making anyone rich, but not wiping out anyone’s life savings either. All in all, multifamily real estate investments offer less volatility than stocks and REITs, are not correlated to the stock market, and offered better annual returns than bonds in all but two years since 2000.

PERFORMANCE COMPARISON

If you compare the performance of a $10,000 investment made in the year 2000 over time, you can see that the growth in multifamily outperforms other asset types, while offering greater stability than typical stocks or REITs. Public REITs come in just below that at $34,277. S&P 500 stocks show gains of $25,513 — but you can see that those high-return years get leveled out by deep market dips over time. Lastly, we can also see the return on bonds essentially returns double your investment  at $20,380. Multifamily shows the best long-term gain at $34,660. 

Most investors will benefit from a diverse portfolio with a mix of high-growth and stable investment types. If private multifamily investments aren’t part of your asset mix, it might be time to revisit your strategies.

MULTIFAMILY REAL ESTATE VS. OTHER REAL ESTATE INVESTMENTS

So far, we’ve taken a thorough look at how real estate, stocks, and bonds stack up against one another. You may be wondering how multifamily real estate specifically compares to other avenues of real estate. When we talk about multifamily, we mean apartment buildings offering dozens or even hundreds of individual homes — and direct-investment limited partnerships of multifamily properties in particular.

In comparison to multifamily, commercial properties — office, industrial, and retail — can be more volatile as they are more susceptible to economic downturn. Industrial properties can be more expensive to purchase and maintain than multifamily properties. The retail industry is undergoing a major transformation, and many properties are struggling with occupancy and rent performance. The office market has seen a significant dip in occupancy since 2020, and many office-only investors are dire financial circumstances in 2023.

Additionally, single-family homes or smaller rentals that investors self-manage require a much greater time investment than multifamily partnerships do. They carry a greater vacancy risk as well. Each move-out with a single-family rental drops your occupancy rate and your rental income to zero. 

Meanwhile, multifamily properties typically offer more liquidity than other real estate investments. They can also be less risky as they are less cyclical and they generate a steady stream of income without a property management burden for investors.

KEY TAKEAWAYS WHEN CONSIDERING NEW INVESTMENTS

– Over the past 20+ years, stocks and publicly traded REITs have experienced both remarkable highs and severe lows, showcasing considerable volatility.

– Stocks offer high potential returns, but the risk rating is correlated. While bonds offer a lower risk, their returns are also lower. Multifamily real estate offers a balance of risk and reward.

– Multifamily real estate compared to other available real estate ranks superior as it offers a steady stream of income, more liquidity, and less risk.

Roers Companies remains firm on the stance that multifamily properties continue to be a compelling investment option; economic fundamentals are still strong, even if dramatized headlines illustrate otherwise. Roers Cos. has a proven track record of success in developing and managing high-quality multifamily properties, and our team is committed to providing our investors with opportunities for stable investments with the potential for attractive returns. If you are interested in learning more about multifamily investing, please contact us today. We would be happy to discuss your investment goals and how we can help you achieve them.

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