When I was a kid I really got into collecting and trading postage stamps. I found it fascinating that I could pay a few cents for a little postage stamp that had limited production and when the demand for that stamp got strong enough I could sell that same stamp and it could be worth a few dollars. That’s the first time it dawned on me that the value of a one inch sticker with a picture had nothing to do with what I paid for it or the number marked on it…it had everything to do with the level of demand for that little piece of paper and glue. And that basic lesson is why today I still appreciate investing in assets where all the data foreshadows continued strength of demand drivers. And that's why I love investing in multifamily residential real estate. 

According to a report by the National Multifamily Housing Council (NMHC), it is projected that approximately 4.6 million new apartment homes need to be built by 2030 in the United States just to keep up with the demand. This equates to around 460,000 new units per year. New supply stats show that thus far we’re not on track to keep up with this demand. The pace of renter growth continues to accelerate, and will be more than double the pace of homeowner growth from 2020 to 2040. According to a research report published by the Urban Institute, between 2020 and 2040, there will be 9.3 million net new renters, a 21 percent increase.

Our country currently faces a shortfall of over 600,000 apartment homes as building never caught up with demand after the shortfall of development caused by the 2008 recession. According to a study by the National Apartment Association (NAA) and the National Multifamily Housing Council (NMHC), we would need to build 4.3 million new apartments by 2035 to catch up with the growing demand.  

Workforce housing refers to multifamily properties for middle-income households, although it can include families earning anywhere from 60% to 120% of their area’s median income. These properties are often Class B apartments that don’t have all the same amenities as the higher-end complexes and serve people who are being priced out of the home ownership market.

We at Wilkinson primarily focus on workforce housing over luxury apartments for two reasons. First, we’re serving a segment with strong unmet demand; we’re meeting a strong need in society. Second, during recessionary times, this class has demonstrated stronger resilience. During economic downturns, as it becomes more difficult to afford luxury rent and more difficult to purchase a home, demand for rental workforce housing increases. 

Even though many developers have seen this unmet demand, the pace of new construction has been far from keeping up. In recent months, development momentum once again faced a significant setback that put us even further behind in the chase to catch up with the growing housing demand in the US. The development delivery pipeline will likely slow past 2024 because of recent delays on so many new projects that couldn't get funded because of inflationary costs and rising interest rates. Of course, economics 101 dictates that this dramatic difference between supply and demand is likely to continue to drive rental rates higher and produce stronger cash flow and values. We saw this dynamic play out during the recent inflationary period where the demand allowed rental rates to increase to more than compensate for the impact of inflationary costs. We continue to see rents being driven by demand, and therefore producing more cash flow to compensate for increased debt service costs from rising interest rates. 

So the trajectory of demand bodes well for continued growth in value of multifamily real estate for years to come.