There are good reasons multi-family housing is still the hottest real estate sectors in the country, according to Jonathan Woloshin, co-head of sector research for UBS Financial Services.
But he also is making a rare call for caution on the part of investors who think it’s impossible to go wrong with multifamily.
“What’s really going to trip us up? I think it’s going to be over-paying, and we’re not going to know until it’s too late,” he told the members of New York Commercial Real Estate Women (NYCREW) at a meeting last week.
In a review of markets across the country, Woloshin pointed to diminishing cap rates and warned that, slowly but surely, the housing market is on its way back.
“One of the ways you can screw it up is by pushing rents to hard,” he said of multifamily investing.
In some California markets, average rents increased nearly 20 percent last year. In New York, the increase was 11.4 percent. “These are sticker-shock numbers for a lot of people, and I really do worry about that,” Woloshin said.
In some markets, including Atlanta and Chicago, average multifamily rents already exceed the average after-tax monthly payments incurred through home ownership.
Less of a concern, in Woloshin’s mind, is over-building. While certain markets, notably Austin and Raleigh, are experience a buildings boom that will in some sub-markets outstrip job growth, most of the country continues to build less housing than would meet the needs of the anticipated workforce.
In New York, housing capacity is scheduled to increase by about half a percent in the coming 12 months, while the number of jobs in the city is anticipated to go up by almost two percent.
Paraphrazing Wayne Gretzky, Woloshin suggested investors should “look at where the people are going.”
“I’ll tell you what I’ve been telling my clients, and it’s been the same story for years,” he said. “It’s multi-family in non-core, non-institutional markets.”
An aging population, people moving from high-tax states to lower-tax states, and young people in the 20s returning to college (and, thus, living in college towns,) are all trends that indicate the smart places to buy multi-family properties.
“You can go to a market like Chattanooga or Nashville where you can get a decent B or B-plus property at a seven or eight cap rate,” he said. “When you can borrow from Fannie at three and a half – and I have clients doing this with their eyes closed – that’s good business.”