Research Report: A Case for Investing in U.S. Apartments

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Abstract

This paper illustrates the benefits of investing in U.S. apartments today by highlighting the key factors that influence their superior risk-adjusted performance and positive contribution to diversified real estate portfolio returns.

Over the last 25 years, institutional investors in the United Stateshave significantly increased their ownership of apartment properties. The apartment sector now accounts for the second-largest share of institutional investors’ real estate holdings, lagging only the office sector. 

During this period, the apartment sector established itself as having the best track record for risk-adjusted returns and recognized diversification benefits for real estate portfolios.  Apartment properties also present investors with a wide range of choices in terms of product, location and advantageous debt financing, allowing them to pursue a wide variety of successful investment strategies. 

Despite its broad recognition as one of the largest and healthiest real estate sectors in the nation, apartments remain overlooked by foreign capital.   Though foreign investment in U.S. real estate has surged in recent years, its allocation to apartments lags well behind other property types.  It is our sense that because apartment properties in the U.S. are part of a market whose structure and operation is quite different from those in other countries, foreign capital does not have the same level of experience with regard to investment in this product. 

Professionally-managed apartment properties in the United States are a highly liquid asset class that is very attractive to institutional capital due to its stable cash flows, abundant debt financing, and unique diversification benefits.

Key Factors:

1. Apartments have a long track record of having the highest risk-adjusted investment returns compared to other property types. The sector has proven to be most resilient during economic downturns, delivering superior returns during recessionary periods.
   
   
2. Apartments have the most efficient cash distribution, due to low capital expenditures and technical improvements.
   
   
3. Apartments have a lower cost of capital and wider availability of debt capital; apartment investments can support more debt with the same level of risk.
   
   
4. Apartments operate in a favorable, transparent, and market-driven regulatory and taxation environment. In addition, apartments have shorter leases than other property types, allowing them to adjust more quickly to changing market environments.
   
   
5. Apartment properties vary widely in terms of age, size, quality, and location, creating a broad spectrum of opportunities and possible investment strategies, thereby providing greater liquidity than other sectors.
   
   
6. Short-term problems from the current economic downturn aside, apartment market fundamentals are expected to remain positive on a cumulative basis over the next five-to-seven year period.  Demand is expected to expand and new supply is expected to subside, creating conditions for moderate rent and revenue growth in most locations.
   
   
7. Apartments are still under-weighted in institutional real estate portfolios.