Is Bigger Really Better?
One of the latest trends in multifamily is decreasing unit size. The sector is aiming at the lower budgets of Millennials, Baby Boomers and our X-generations during our long drawn out financial recovery.
The multifamily sector has had success in the down market precisely because people have been squeezed financially. People also want to be closer to amenities like gyms and walking paths. Overall, the multifamily sector has been successful as an investment vehicle and will continue to be a safe place for investors in the extended future. Now more than ever, the phrase “if you build it, they will come” rings true for multifamily development in the city core.
Housing construction is down in most parts of the country and certain metros are losing momentum in rent growth, including those in the Bay Area, Denver, and Houston. Still, construction activity remains elevated, but recently has shown signs of cooling according to the National Multifamily Housing Council.
When I was growing up, I remember dreaming about having a nice large home with some land around it and maybe some horses or a pond. Lucky for me and many of my close friends, we were able to achieve that and we’re grateful for that. Today, the young people I’m around don’t aspire to that same big home in the ‘burbs. They are thinking more about survival and making more money. For them, it seems like there is never enough.
Most of the young people I’m around seem to be stuck in the floundering economy. Jobs aren’t plentiful and the ones out there don’t pay enough.
This all points toward fewer home owners and more apartment dwellers. The big plus for Tucson is the affordable rents. One can lease a small 1 bedroom 1 bath apartment for less than $500 a month and a 2 bedroom 1 bath for under $600 a month In comparison to Denver, San Francisco, New York and Chicago these prices for rent are unheard of.
What about multifamily as an investment? The prices to buy multifamily are just as comparable as the rents are and the Net Operating Profits are in the 7-9% range depending on age and other factors. That is exactly why people from California, Canada and Mexico are flocking to Tucson to invest in multifamily. Where else can you get that kind of return on your investment?
The fact is that you can buy 50 units in Tucson for the same price as 20 units in one of the major cities mentioned earlier. Due to the strong demand, developers can build higher-density apartments with smaller units, resulting in higher revenue.
Suburban markets are still extremely undersupplied, so there’s also plenty of absorption capacity there. Tucson is a hot market both for sellers and buyers. The values are unbelievable and costs are low. Now’s the time to jump in or out.