Multifamily Development: Can You Always Lease It Up?

Abstract

Large institutional investors continue to view multifamily real estate favorably and raise their allocations to this sector. It is commonly perceived among institutional investors that multifamily—and multifamily development in particular—is a safer investment relative to other property sectors, a common refrain being “you can always lease it up.” In this article, the authors attempt to validate this statement by examining the distribution of lease-up terms from initial lease-up to stabilization for multifamily developments delivered in the United States between 2008 and 2018. In addition, they investigate the impact of the length of the lease-up period on effective rents. Unfortunately, they do not have underwritten projections for each development to compare with subsequent performance as a mechanism to determine an investment’s success. Despite this gap in the available data, the authors generally find support for the conventional wisdom; most developments are able to lease-up in a relatively expedient fashion, no matter the position in the economic/business cycle. However, effective rent change over the lease-up period varies significantly by point of cycle and lease-up term and is an important factor in the investment performance of multifamily developments.

TOPIC: Real estate

Key Findings

• • Multifamily development is considered lower-risk by many investors, relative to other property sectors, as you “can always lease it up”.

• • Our research confirms this – relatively expedient lease-up is achieved across markets, vintage, property size, etc.

• • Effective rent growth, on the other hand, is more sensitive to these factors, and varies significantly by lease-up term.