Older Multifamily Buildings Posting Stronger Rent Growth

Multifamily buildings constructed before 2010–approximately 13 years old or older—have posted strong rent growth of 4.6% on average over the last decade versus 3.4% for buildings after that benchmark, according to CBRE. 

The trend is mostly due to the fact that the older buildings have had lower average rents, leaving more room for growth since demand has intensified in the housing sector. The older properties have also experienced less volatility in their rent swings up and down or as the report said, “have been less affected by external shocks like recession.” This is known from CBRE’s analysis of the overall annual performance of multifamily properties since 1998, a time period that has experienced three recessions.

CBRE also has gleaned helpful information that helps investors make smart decisions about the trajectory of future rent growth based on the age of the property and how long it is held. It has found that it takes two decades for annual rent growth to outpace the long-run market average of 2.7%. The first year after construction average annual rent growth is 3.8%. In the third decade, rent growth speeds up more and peaks between 3.5% and 4%.

But investors are wise to understand a caveat CBRE shares. Many older properties require more capital expenditures than newer properties. These might include new roofs, new HVAC systems, tuckpointing and new windows. Older buildings also may lack the modern features that attract the affluent renter. In recent years, these have included more outdoor space, often programmed for activities and classes, more use of rooftop areas for swimming pools, cabanas and barbecues, more pet parks and trails, more sustainable materials, and so on.

Also, managing turnover and rent collections may become more challenging, the report says. But it adds that such risks are often accounted for in underwriting metrics such as higher Cap rates or internal rates of return. So, to be diligent, investors who do consider older properties should be sure that pricing is risk-adjusted.