New Standard Equities Founder & CEO Edward Ring spoke with Institutional Real Estate, Inc. on what’s ahead for the multifamily sector with rising inflation creating some challenges. “It’s a mixed bag,” said Edward Ring, regarding expectations for the multifamily sector in the year ahead.
“As the proverbial ‘wallet share’ rises in markets where a resident’s true take-home pay is stagnant or even dropping due to inflationary effects, we’re going to see some cap rate decompression. If residents can’t support new rent levels, then investors can’t buy projects or build projects at perpetually rising costs,” he adds.
“In Los Angeles, we’ve been seeing that number hover around 45 percent,” added Ring. “If you go back 20 years or so, that number was 40 percent, and we were starting to panic as the ‘rule of thumb’ should be to keep that number around 30 percent. Now, with true inflation at 7 percent, 8 percent, 9 percent, incomes have to rise to offset a resident’s rising costs in other parts of their lives.”
A strong local economy is likely to be needed to support wages and allow residents to continue to afford apartments. Luckily in California, there is a huge, diverse set of employers who can keep incomes rising. Ring added that he is most concerned about the Sun Belt region, which could return to more traditional cap rates if income levels don’t keep pace with rising rents.
As for opportunities, “From my vantage point, I see the San Francisco Bay Area as being prime for investment in the rest of 2022 and 2023. Greater Seattle’s east side and the north end are also particularly interesting to me. Denver has a very compelling story. And the Inland Empire in Southern California will likely continue to grow along with continued industrial investment in distribution facilities in that area.”
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