When it comes to real estate, apartments are considered one of the primary property types along with office, industrial and retail. Generally, apartments with fewer than five units are classified as residential property while apartments with five or more units are classified as commercial property.
There are many reasons why apartments are considered a great investment. First, they offer the highest returns out of all the real estate asset classes. A recent study found that apartments dominate holding period returns and risk-adjusted returns for 3, 5, 7, 10 and 15-year holding periods.
The study analyzed holding period returns during the years 1987 and 2016 and found that, for the 7-year holding period, in particular, apartments produced a 9.05% return compared to retail at 8.68%, hotels at 8.63%, industrial at 8.27% and office properties at 6.99%.[i]
Second, this same company that analyzed holding period returns also studied the returns of real estate, stocks and bonds to determine which investment type had the most years with positive returns compared to the fewest years with negative returns. They found that, historically, real estate offered less risk and better returns than stocks and bonds. Real estate had positive returns in 70 of the 80 years tracked while both stocks and bonds each had fewer than 60 out of 80 years of positive returns.[ii]
For every year of negative returns, it takes about two additional years of positive returns to get back to even. If you have negative returns happening every three-to-four years, as occurs in the stock market, it could wipe out decades of positive returns. A Bear market occurs in the stock market on average every 3.4 years while a downturn in the real estate market occurs on average every 18 years. Therefore, having more years of positive returns is very significant to your overall investment strategy.
Third, with the population in the United States continuing to increase and homeownership significantly decreasing, apartments make the ideal investment. The most recent data indicates that homeownership peaked in 2008 at 69% and has steadily declined to where it’s about 64% today. That means that as population growth increases and homeownership rates decline, the demand for apartments just keeps rising. We’ve become a nation of renters.
Fourth, according to the National Multifamily Housing Council and the National Apartment Association, nearly 39 million people live in an apartment. It will take an average of 325,000 new apartment units to be built each year to keep up with demand. From 2012 through 2016, only 244,000 apartment units were delivered each year. Predictions are that between now and 2030, more than 4.6 million apartment units must be built across a wide range of price points to keep up with demand.
What all this should mean to you is that apartments will make a great investment for years to come. That doesn’t mean you can throw caution to the wind and invest in any market and still be successful. It’s important to look at the location and other demographic indicators such as job growth, wages, population increase, supply vs demand, and other factors to determine which markets are best. Generally, investing in the Intermountain West, West and Southwest are better than investing in the Southeast, East or Midwest.
If you are considering investing in real estate as a strategy for diversification and asset allocation, you should consider investing in apartments. They offer the highest returns, the most stability with the least risk, the best demographics and the most demand for long-term growth potential compared to stocks and bonds and the other major real estate asset classes.
[i] Life Bridge Capital
[ii] Sources: NCREIF, Bloomberg, Barclays, Lehman, RCG