Before the pandemic struck, the multifamily market suffered from a severe supply-demand imbalance that fueled an affordability crisis both nationally and in states like California. Nothing has changed. The supply-demand imbalance remains, and the pandemic has only exacerbated the problem. As a result, multifamily remains an attractive investment bet.
“Multifamily has long been a favored asset class, in large part because of an extreme supply/demand imbalance. The home ownership rate plummeted—from about 69% to 64%—since the Great Financial Crisis causing millions of American homeowners to rent,” Mitch Siegler, senior managing director and co-founder of Pathfinder Partners, tells GlobeSt.com. “The Millennial generation, now larger than the Baby Boomers, enjoys mobility and prefers renting to buying. Many in this cohort have high student debt, pressuring their ability to assemble a down payment. These supply-demand dynamics remain in place and, to some extent, have been exacerbated by the pandemic.”
Pathfinder is based in San Diego, and has continued to be a net buyer through the pandemic. “We’ve made several acquisitions this year,” says Siegler. “As I mentioned in the previous question we focus on resilient markets characterized by many jobs in resilient industries and fewer jobs in vulnerable industries.”
The firm is also focused on its target investment strategy, and is active in Seattle, Portland, Sacramento, San Diego, Phoenix and Denver. “Pathfinder has long favored Class-B, suburban properties in resilient markets,” says Siegler. “These cities are characterized by many jobs in resilient industries and fewer jobs in vulnerable industries. Many of the professionals who rent our apartments can work from home. And, the “time for money” tradeoff these residents made has become more favorable since commute times are shorter now and many people are commuting just one-to-two days per week.
In addition to supply-demand dynamics, Pathfinder is also active in markets with limited new construction activity. “In many of Pathfinder’s markets, there are considerable barriers to new supply, meaning that not enough housing is created and the only new supply are class-A or luxury apartments, unaffordable for many,” says Siegler.
This strategy has proven to be successful, even through the pandemic, but, like all asset classes, there have been challenges. As a result, Pathfinder has adjusted its underwriting to reflect the new market conditions. “We have experienced very strong occupancies and rent collections this year though there are increasing signs of softening collections, which could worsen if Congress does not pass stimulus/enhanced unemployment benefits soon,” says Siegler. “We do not expect market rent growth in most of the cities where we operate for the next 12-18 months. We are working hard to hold onto tenants for a longer period of time, which reduces marketing and turnover expenses.”