It’s a season filled with family, friends, and economic lessons.
For some, it is the lesson of sticking with a budget. For others, it might be the ills of credit card debt. However, the most interesting economic lesson to me is that of supply and demand.
Every year some toys go viral.
They end up on every child’s must have list and the manufacturers can’t keep up with the demand.
There are stampedes at retail stores, empty shelves, and black market resales with gigantic markups.
Looking back, it’s hard to believe the prices that some people paid for that special Cabbage Patch Doll, Beanie Baby, and Tickle Me Elmo.
As crazy as those seemed, it was a lesson in supply and demand.
Supply and demand also affects commercial multifamily real estate. In fact, it is one of several economic factors that make this asset class so compelling.
Consider a recent article in GlobeSt. (a commercial real estate trade journal) published in August of 2016 entitled “Why Choose Class B Apartments Over Class A?” In it, the author describes the significant under building that has led to such a small supply.
“In the 1970s, 4.87 million apartments were delivered, and there were 216 million Americans at that time. There were 4.2 million apartments delivered in the ’80 s, and the US population was 238 million. In the 2010s, it’s expected that we’ll have under two million deliveries, and there are 321 million people living in the US. “
“The reality is that we’re not delivering nearly the number of apartments that are needed by the population.”
While this under building has gone on for more than a decade it continues to worsen. Currently we are shorting the market 1.5 million units nationally on an annual basis.
But what is driving such high demand?
It really comes down to four factors:
Since I don’t want this article to turn into a book, I’ll cover each one of these factors in a series of posts to come.
For now, let me say that these four factors combine to create what the Urban Institute calls, “a perfect storm of factors.” In fact, their research has led them to proclaim:
The good news is that those investors who have diversified into multifamily are prepared. They’ve positioned themselves in front of this “perfect storm of factors.” They’ve enjoyed compelling returns. And given stats like the ones above, is it any wonder why the Urban Institute’s research projects:
The fundamentals propelling investment in this asset class are undoubtedly strong.
While this compelling supply and demand story may be analogous to 1996 and the phenomena that was Tickle Me Elbow. Clearly, apartment investing is no fad. The fundamentals of this asset class have staying power like Barbie, LEGO, Hot Wheels, and the Hula Hoop.
This isn’t brain surgery; it is economics 101:
- Serve the largest population you can (almost 40% of the U.S. population rents and growing)
- Serve them as long as you can (an investment in apartments is an investment in the basic need of shelter which will never go away)
- Serve where demand is high and supply is low
If you want to learn more about the fundamentals and demographics of this asset class, download your free copy of Evidence Based Investing now.
And for those physicians and non-physicians who want to learn more about how to qualify to see our deal flow, probably the simplest way to do so is to book some time on my calendar to speak. There is no obligation and no sales pitches.
To Your Wealth!
Dennis Bethel, M.D.
P.S. Wishing you and yours Happy Holidays!