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The Top 10 Markets for Smaller Multifamily Investors

For Budgets Up to $20 Million, These Markets Have Been Top Performers Over the Past Year

By Lauren Shanesy LoopNet April 29, 2021 | 8:10 AM

The pandemic disrupted not only how Americans work, but also where they live. No longer reaping the benefits of the live-work-play lifestyle, residents of top-tier cities went in search of more affordable housing options. While some markets fell out of favor and posted losses throughout the last year, others thrived and generated high returns for apartment owners.

Using data from CoStar, the parent company and publisher of LoopNet, we analyzed markets with property sales priced at $20 million and below to develop a list of the top 10 markets that smaller investors should consider when purchasing multifamily properties.

We based our analysis primarily on three key factors for multifamily investment:

  • Liquidity: The rate at which properties are traded for stable prices. Trade volume was determined in this case using the total number of apartment sales under $20 million since 2018.

  • Rent growth: Year-over-year (YOY) rent increases from the first quarter of 2020 to the first quarter of 2021.

  • Demand: Net absorption of units (change in occupancy and vacancy) over the last four quarters ending in the first quarter of 2021, defined as a share of existing inventory.

Our ranking also took into account average rent prices (a total average of rent per unit across all unit types), supply risk, cap rates and vacancy levels as of the end of the first quarter.

The markets that stand out for multifamily investment have a defining theme — they’re characterized by affordability, offering a less expensive alternative to nearby top-tier markets where the pandemic paused in-person office work. They also exhibited strong year-over-year rent growth, which enabled investors to profit even throughout the pandemic. Save for the Inland Empire, all of these markets offer average rents below the national average of $1,401 per month, and also experienced rent growth well above the national average of 2.9%.

All of these markets also experienced strong trading volume over the past year, with liquidity rates ranging from 22% in Spokane, Washington, at the low end of the spectrum (which is still above the national average of 20.7%) to Phoenix’s rate of 40%. Further, cap rates in these markets range from 5.4% in Inland Empire, California to 7.6% in Indianapolis, providing investors with stable property options with strong returns.

Without further ado, here is LoopNet’s list of the top 10 markets for multifamily investment opportunities under $20 million in 2021:

  1. Fresno, California

  2. Stockton, California

  3. Inland Empire, California

  4. Tucson, Arizona

  5. Las Vegas

  6. Albuquerque, New Mexico

  7. Spokane, Washington

  8. Phoenix

  9. Indianapolis

  10. Atlanta

Fresno, California

Fresno tops our list of the best multifamily investment markets, with the lowest vacancy rate of just 1.9%. “The vacancy rate in Fresno is at an all-time low, yet rent growth is off the charts at 7%, especially considering that vacancy level,” said David Whitmore, market analyst at CoStar.

These performance numbers could be explained by Fresno’s strong apartment demand, as a modest median income makes homeownership here less attainable for many residents, but offers an affordable alternative to most California markets in terms of rent prices. A Fresno household would need to earn $54,000 per year (which was the median household income as of 2019) in order for the city’s average rent of $1,118 to be considered affordable (defined by 25% of income or less), according to census data. This compares favorably to nearby Stockton at $67,000 and Modesto at $63,000.

Additional metrics: • Liquidity: 35% • Cap Rate: 6.7% • Demand: 2% Stockton, California

Like Fresno, Stockton also experienced a 7% YOY rent growth. Located just outside of the Bay Area, Stockton’s rental rates (averaging $1,388) are around half the price of nearby San Francisco — one of the most expensive cities in the country at $2,788 — yet the city is within commuting distance to its more expensive neighbors. Like most of California’s markets, construction here has been thin, said Whitmore. “The population growth from people leaving the Bay Area, a lack of new supply and a strong demand for apartments since homeownership isn’t attainable yet for most renters here, has led to the strong rent growth.”

The supply here mostly consists of one- and two-star buildings, with very few four- and five-star properties, said Whitmore. “The older product, of course, affords value-add opportunities, where an investor can buy a decades-old property, perform a ’shoeshine’ if you will, where they update the landscaping or make other modest renovations that are enough to allow them to raise the rents.”

The market also offers a solid return, with cap rates in Stockton sitting at 6%.

Additional metrics: • Liquidity: 38% • Vacancy: 2.2% • Demand: 3.5% Inland Empire, California

Compared to rents near or exceeding $2,000 in the nearby regions of Los Angeles, Orange County and San Diego, average rents in Inland Empire come in around $1,669. An onslaught of renters with jobs based in those high-income areas who were seeking less expensive housing made this market’s rent growth of 11.5% in the past year the highest on the list, according to Rafael DeAnda, senior market analyst for CoStar.

The Inland Empire also provides investors with ample value-add opportunities.

“A lot of the Inland Empire’s apartments were built 10-15 years ago before the [Great Recession], so there was a lot of supply at that time. Now those properties offer value-add opportunities for investors, especially as we’re seeing such healthy fundamentals and high rent growth,” said DeAnda. “It makes a lot of sense to buy something that’s not too old and doesn’t need too much work, invest a bit of money into it, and get some great returns.”

Additional metrics: • Liquidity: 25% • Cap Rate: 5.4% • Vacancy: 2.3% • Demand: 3.6% Tucson, Arizona

An even more affordable market relative to the already budget-friendly nearby city of Phoenix, Tucson stands out on our list for its average rent price of $903 and significant rent growth over the past year of 9.1% — the second-highest increase of any market after the Inland Empire. “Any metro that is near a relatively more expensive metro is really thriving right now,” said Jessica Morin, director of market analytics at CoStar.

Low single-family housing inventory in Tucson is driving renter demand for apartments. At the same time, construction costs are increasing, so new development in Tucson is fairly stagnant as the cost to build doesn’t justify the market’s rent prices. “That’s why we are seeing such low vacancy in Tucson right now,” said Morin, referencing the city’s 5.1% vacancy rate. She noted that there are still some value-add opportunities in Tucson, though those properties are competitive. Cap rates here stand at 6.9%.

Additional metrics: • Liquidity: 33% • Demand: 1.9% Las Vegas

There has been a healthy amount of construction in Las Vegas for the last 10 years, which DeAnda noted provides buyers with a stabilized investment with solid returns. “Anytime you have new construction, you have assets that don’t need maintenance and are in high demand with high rents,” he explained. “You make a purchase and know you’re not going to need to invest much more after the fact for a while.”

One of the primary demand drivers in Las Vegas is affordability (average rents here are $1,175), especially for high earners in the entertainment industry. But DeAnda noted that the city is at an inflection point — the town was booming pre-pandemic with increased tourism, and while it’s starting to recover, it still doesn’t have the amount of tourism it had before.

“The unemployment rate remains a little bit high and that creates some uncertainty for investors, so there is likely going to be some discovery in the Las Vegas market,” he said.

“You could be very optimistic right now because things are looking up, but it’s also possible some investors might want to hold back and see how the market recovers.” Still, the Las Vegas market posted high rent growth of 8% YOY.

Additional metrics: • Liquidity: 32% • Cap Rate: 6.7% • Vacancy: 5.7% • Demand: 3.3% Albuquerque, New Mexico

One of the most significant drivers of Albuquerque’s economy and its housing market is its significant employment base and continually diversifying economy. It’s home to the sixth-largest air force base in the country and hosts the main campus of the University of New Mexico. In the past few years, Netflix and NBC Universal have announced plans to open production facilities and film studios in the city, and Facebook will open a 1 million-square-foot data center, which will in turn lead to the production of several solar farms to power it.

Albuquerque is another market where affordability drives interest from renters. Rents here average $919 — around 25% lower than Phoenix and 50% lower than Denver, and rent growth continued throughout the pandemic at 8.1% YOY. Jeannie Tobin, director of market analytics at CoStar, noted that while the new supply pipeline in Albuquerque has been muted, the projects that have broken ground in the past year have leased up quickly even throughout the pandemic and shutdowns. Albuquerque’s vacancy rate stands at 5.1%.

Additional metrics: • Liquidity: 27% • Cap Rate: 6.9% • Demand: 1.7% Spokane, Washington

A small college town in eastern Washington and home to Gonzaga University, Spokane has the highest demand rating of our 10 markets at 4.3%, paired with a low vacancy rate of 2.5%. The demand can be at least partially attributed to the market’s affordability — average rent here is $1,096 — especially relative to nearby cities and metros up and down the West Coast. With the pandemic spurring West Coast remote workers to leave dense cities for a lower cost of living and an environment with more outdoor activities, the city has seen rent growth of 8.2%. Compare that to San Francisco (which saw negative rent growth of -9.8%, the most drastic decrease of any market) Seattle at -2%, and Portland, Oregon at 2.7%.

In Spokane, investors will primarily find an inventory of one- to three-star properties and suburban, garden-style apartments, which can offer value-add opportunities. Ongoing job creation from Amazon's industrial operations will create even more demand for multifamily units in Spokane, noted Jared Kadry, senior market analyst at CoStar. “Those thousands of jobs will make a big impact [in this market], and three-star units are easily attainable for a workforce in that industry, which will contribute to rent growth,” he said. “Even the four- and five-star product under development right now will be affordable to them because it’s less expensive there.”

Additional metrics: • Liquidity: 22% • Cap Rate: 6.7% Phoenix

With an economy that primarily revolved around home building, Phoenix was one of the hardest-hit markets during the Great Recession. But over the past decade, Phoenix has shaken its boom-and-bust reputation and has seen significant job growth in financial, tech and manufacturing sectors. “Phoenix’s diversification of industry has been key to its resiliency during this downturn,” said Morin. The affordable metro attracts residents from California looking for a lower cost of living, and low single family housing supply has kept would-be homebuyers in rental units — creating the perfect storm for low vacancy rates in the metro and high rent growth (8.7%) throughout the pandemic.

“Not even just now, but over the past two years, Phoenix has led both single family price appreciation and apartment rent increases,” explained Morin. “That may become a potential concern for investors going forward, but they’re still bullish on the market because even if prices increase, Phoenix will always be affordable relative to California and other expensive markets.”

Additional metrics: • Liquidity: 40% • Rent: $1,281 • Cap Rate: 5.8% • Vacancy: 5.6% • Demand: 3.5% Indianapolis

A strong and continually growing economy in Indianapolis, paired with an affordable cost of living, has put the Indiana city on investors’ radar. Job growth here only fell by 0.4% YOY, while other proximate similar Midwestern markets, such as St. Louis, Cincinnati, Cleveland and Memphis, Tennessee, for examples, all had job growth fall by more than 1%.

Average rents here are $975, despite high year-over-year rent growth of 5.5%, said Chris LeBarton, managing analyst at CoStar. “Landlords see the great recent performance here, and there’s still runway ahead of them given the current asking rents,” he explained.

LeBarton said the city offers little downside risk for investors and sales volume has remained strong throughout the pandemic. The average sales price is $95,000 per unit, which is a discount compared to markets with similar characteristics including Albuquerque, New Mexico, St. Louis, Tucson, Arizona, and Louisville, Kentucky, and average cap rates are at 6.5%.

Additional metrics: • Liquidity: 28% • Vacancy: 7% • Demand: 2.9% Atlanta

Demand for properties in Atlanta is high (3.9% by our ranking) and the Georgia city has been posting record-high metrics throughout the pandemic, said David Kahn, director of market analytics at CoStar. In the fourth quarter of 2020, Atlanta had the highest deal volume in the country at $4 billion worth of apartment trades, driven mostly by out-of-state investors.

While Atlanta now skews more toward new builds and institutional development, there are still one- to three- star buildings with low barriers to entry that will provide investors with value-add opportunities, price appreciation and rent growth (cap rates in Atlanta are 6.4%). The industrial market in Atlanta has been booming, said Kahn, and the income levels in that job sector are creating a strong demand for rental units at the lower end of the price spectrum. Renters in all sectors are drawn to Atlanta’s diverse industry, which includes new tech hubs from Google and Microsoft, and education institutions such as Emory University and Georgia Tech.

“In recent years, investors throughout the country have become a lot more confident in the Atlanta market from an investment perspective due to its strong demand drivers — a strong local economy, net migration and population growth — and while affordability is narrowing and the city is now more in-line with national average rents, it's still affordable compared to your coastal metros and still has strong rent growth,” said Kahn.

“The barriers to entry aren’t as high, and from a performance perspective, there is nothing not to like with 8% rent growth.”

Additional metrics: • Liquidity: 36% • Rent: $1,361 • Vacancy: 7.8%

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