Several Less-Targeted Multifamily Markets Offer Good Yield Opportunities for Investors

An analysis of multifamily investment since 2021 reveals several less-targeted markets, such as Salt Lake City and California’s Inland Empire and Orange County, that offer returns rivaling fast-growing Sun Belt markets with less competition.

While year-to-date 2022 multifamily investment is up 22% through Q3 from the same period in 2021, activity has slowed considerably in recent months due to the spike in interest rates. Q3 multifamily investment volume was down by 19% from Q3 2021. This downward shift likely will continue in the first half of next year as buyers, sellers and lenders all wait for interest rates to stabilize.

Figure 1: U.S. Capital Markets Investment by Property Type

Source: Real Capital Analytics, CBRE Research, Q3 2022.

The multifamily sector has seen a significant shift in buyer activity since 2019. Private investors’ share of total multifamily investment increased to 30% in 2022 from 23% in 2019, while institutional investors’ share rose to 10% from 7%.

Figure 2: U.S. Capital Markets Investment Composition by Buyer Type

Source: Real Capital Analytics, CBRE Research, Q3 2022.

Although the percentage of capital being invested in garden-style and mid-/high-rise properties has been consistent over time, multifamily investors have redirected their geographic focus.

From 2018 to 2022, garden properties accounted for 65% of all multifamily investment, while mid-/high-rise captured 35%. Historically, the six gateway markets¹  have accounted for roughly half of mid-/high-rise investment. However, since 2018, Sun Belt markets have captured a growing share, peaking at 47% of all mid-/high-rise investment in 2021. The balance was mostly in gateway markets, but the trend reversed slightly this year. For garden-style apartments, the shift has not been as pronounced. Prior to the pandemic, the Sun Belt accounted for 58% of garden-style multifamily investment, which has increased to 65% today.

Figure 3: Mid-/High-Rise Multifamily Investment Composition by Market Type

Source: Real Capital Analytics, CBRE Research, Q3 2022.

Multifamily investment varies considerably from market to market—even when scaling by market size. In Figure 4, recent (2021-2022) multifamily investment per unit of inventory is plotted against the five-year annualized total return for each market. The positive relationship between investment activity and average returns helps explain some of that variation.

Markets like Salt Lake City, the Inland Empire and Orange County, CA fall well below the trend line, and the returns they have generated suggest they should have commanded a greater share of investment capital. As multifamily fundamentals begin to normalize, these markets could provide an opportunity for investors looking for less competition and relatively strong returns.

Figure 4: Proportional Investment (2021 – 2022) vs. Five-Year Annualized Total Returns

Source: Source: Real Capital Analytics, NCREIF, CBRE Research, Q3 2022.

¹ Boston, Chicago, Los Angeles, New York, San Francisco and Washington, D.C.