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Real estate investors are clamoring for place to invest their capital. The office market faces uncertainty, as many employers downsize in anticipation of a recession, not to mention the efficacy of office use in the future. Retail is a mixed bag with malls dying or being retooled, and big box retailers being obsolete…neighborhood (Amazon-proof) centers are still attractive. Industrial is still hot as well as multifamily. However, all is in flux as the Fed seeks to tame inflation by raising interest rates. Debt is hard to get during these uncertain times, and all investment capital is reliant on the cost of debt for leverage or as a benchmark for expected returns on equity. Stay tuned!!
Multifamily is still very much a sought-after asset class. A subcategory has come into focus – that of Townhome Rental Communities. What’s the draw – the good, the bad, the ugly?
Townhome Origins
My first investment out of school was a townhome. What was the appeal? It cost less than a house, was typically a denser community, was developed in a more urban area (exciting for young people),was smaller footprint to maintain, and had a yard and shared amenities, like a pool. It was like an apartment complex with more privacy and ownership. Multistory condominiums existed, but you felt like you weren’t getting as much for your money, the homeowner dues seemed higher and there was usually a loud neighbor. FYI – the cost was $98,000 for $1,250 sf 2br/2ba. HOA dues were $80/month to care for reserves and a pool. The loan required 20% down payment, and the interest rate was 9%. My, how times have changed!!
Townhome Appeal Today
Many of the same appeals exist today. The rental aspect has come into play because of the large housing affordability crisis that exists. Today, a townhome for purchase may cost $300,000. Poor credit scores from the great recession, and lack of equity make all homeownership unattainable. So, rentals have become an option. Why wouldn’t a developer just build garden styles apartments? Townhomes appeal for those wanting more space and to families. More importantly, this asset class has now been adopted/recognized by institutional capital.
The housing industry is supported by semi-private institutions called Fannie Mae and Freddie Mac. They provide debt securitization for loans behind all the residential houses in the US. These institutions are now treating Townhome rental as they do apartments, so debt exists to build neighborhoods of townhomes for rent. Because the debt is secured by the government in essence, now the institutional investors are stepping in to invest in this asset class just like apartments.
Conclusion
renters want more “house appeal” than they are finding in garden styles apartments and townhomes are more attractive in many ways. So, the demand is shifting toward a little higher rent to get more of a home! The lesson learned? Follow the capital markets – where the government steps in the provide safety in investments, the equity/investors will follow.
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