Per data published by Mountain Dell Consulting, residential/multifamily properties accounted for 62% of all DST1031 Property investments in 2017. While all real estate asset classes have their respective strengths and weaknesses, well positioned residential properties in areas of growing population and constrained competition from new supply have many characteristics that attract investors.
Perpetual Lease Term. Unlike many other asset classes that have finite lease terms, residential properties are constantly being leased subject to local market supply/demand conditions. While residential properties, like all other asset classes, are subject to vacancy risk, the loss of a single tenant is not nearly as catastrophic as losing a tenant in properties that have a limited number of tenants. Those assets with fixed lease terms such as retail, industrial, or commercial experience a decline in their remaining lease term over the investment holding period. Since the remaining lease term at time of future sale will be less than when the investment was first made, there is added risk that the exit value of the property may be less than at time of the original investment. Even properties that are performing well are subject to added risk since there is nothing to prevent a tenant from deciding to not renew a lease. Over our many years of managing properties on behalf of investors, we have seen situations where retailers have chosen to close a top performing store to build an even more successful newer store in close proximity to the former store. This type of re-leasing risk is inherent in all real estate assets that have a fixed term. Tag : DST1031 Property
Inflation Hedge. As our economy shows signs of heating up, many analysts predict that inflation rates will rise. The rents for residential properties can be adjusted with greater frequency to offset inflation. Those assets with fixed leases generally have limitations on the amount of rent increases that can be passed through to the tenants. If the general rate of inflation outstrips those limits over the holding period of the investment, the rental income at time of a future sale may be less than competing properties thereby potentially negatively impacting property value.
Avoidance of the Amazon Effect. The growth of firms such as Amazon, Google, and Uber and their impact on disrupting traditional retail businesses raises risks that the future value of certain businesses may suffer. In January 2018, Amazon, Berkshire Hathaway, and JP Morgan announced a plan to offer lower cost healthcare services which, on the day of the announcement, dropped the values of the 10 largest insurance and pharmacy stocks by $30 Billion. Many investors who have previously invested in fixed lease term assets are noting the impact of these market changes and are shying away especially from retail assets that may be subject to future disruption.
Prior Investor Experience. During our ongoing investors surveys, we have noted that most of our investors have generated the most significant portion of their historical real estate gains from investments in residential properties. Our investors tend to heed the advice that one should invest in what they know and understand best. As a result, most our investors are more comfortable reviewing and investing in residential properties – especially those that are managed by competent management firms who can relieve investors of their previous management responsibilities.
Demographic Trends. According to the Pew Research Center, more Americans are renting their homes today than ever in the last 50 years,. There is growing demand for apartments across all age groups, including middle-aged adults who have traditionally been less likely to rent. The 2008 recession soured them on homeownership as a sure way to wealth. The rising costs of homeownership relative to renting including the impact of new tax reform legislation which lessens incentives to own homes is tipping the economics for many individuals towards renting versus owning. Renters do not pay property taxes or homeowner association fees and need not worry even about property maintenance. Renters also have the flexibility of not being tied down. At the end of the lease, they can more easily leave and move to a new location. Per U.S. Census Bureau figures, vacancy rates continue at historic lows in over the past year and many investors and analysts expect this trend to continue.
Of course, not all residential investments are equally desirable, and many may not be suitable in meeting investor objectives. First Guardian Group’s track record in managing many residential and student housing properties over our 15-year history provides us with significant experience to assist investors to select the most suitable multifamily DST investments.
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