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Multifamily Baltimore: Growing supply and transaction volume and what is drawing Investors to this Marketplace.

We recently spoke with Mike Muldowney, a member of CBRE’s investment sales team who covers the Mid-Atlantic, about multifamily real estate. Here are portions of that interview...
WPM: Describe the multifamily market. What’s drawing investors to the market?
Muldowney: Multifamily real estate is an asset class that is “needs-based,” since everyone needs a place to live. Consequently, multifamily real estate remains highly occupied and generates strong revenue – similar to self-storage, another asset class, but not serving as critical a need as housing.
Unlike other investment types, like industrial and retail offices, which offer multiyear leases, multifamily real estate gives the investor 12-month rolling leases that can be increased as the economy improves or with inflation. This provides an opportunity to move rents and the resulting revenue by two or three percent annually. What’s more, stable multifamily properties maintain 90-95% occupancy rates.
Years ago, ownership of multifamily properties was family-based, and family-run businesses would run the facilities, collect rents, maintain the community, etc. In the mid-90s multifamily real estate evolved into more of an institutional investment type, through publicly traded REITs, and pension funds investing in this asset class, making it a more transparent and understandable asset type. Today, multifamily real estate has become much more popular, as it is fairly predictable and favored by the capital markets, from equity to debt offered by banks, life companies or agencies like Fannie Mae and Freddie Mac.
WPM: What do you think will be the biggest opportunities for multifamily real estate?
Muldowney: One clear opportunity is workforce housing: rental housing that is priced to meet the need of the majority of our workforce. The formula for measuring the affordability of rental housing is typically that a worker can afford one-third of their take home pay on housing. So, someone with a weekly paycheck of $825 to $960 can afford a monthly rental expense of $1200 to $1400.  At this rent level, it is also reasonable to expect those rents to increase 2% to 4% per year.
After the great recession, homeownership dropped from just over 69% to less than 63%. That’s a move of over 6% on 350 million people, creating a surge in the rental market. And then there’s the entry of the Millennials into the housing market. So far, they seem less excited about homeownership, as they delay marriage and shop for their best possible job. Meanwhile, Baby Boomers are becoming empty-nesters, and many don’t want to maintain a home.
WPM: What issues or challenges have multifamily owners/investors faced over the past few years?
Muldowney: Increasing overture of jurisdictions about restricting rents on housing – not letting the market dictate price – and some over-regulation in major jurisdictions like California, New York and Washington, DC.
For the past several years, we’ve seen more investment capital coming into the multifamily real estate space. It used to be an investor would solve for a leveraged return approaching 20% for a 10-year investment; that number has come down to the low teens due to fierce competition between interested investors.
WPM: How would you describe the current transaction volume?
Muldowney: Prior to COVID-19 and the resulting economic contraction, I would have said it’s on fire as it was in 2019; that nothing has slowed down, and that there is plenty of equity and debt to purchase these properties, making it the most preferred asset type.
But with COVID-19, the credit markets, and specifically the multifamily mortgage markets, have become volatile from day to day. Travel bans have made it harder for potential investors to tour opportunities. Stay-at-home orders and restrictions on non-essential businesses have created more challenges for closing deals, including logistics related to inspections, reports, and recordation. All parties are having to work together to leverage technology and find alternate solutions.  
Additionally, with the potential of renters losing their jobs due to closings, cancellations, and executive orders being imposed across the country, owners are concerned about renters being able to pay their rent. The upper end of the spectrum is expected to weather the situation better, as residents in these communities are likely to be in better financial standing. Workforce housing has been in high demand leading up to this period and is anticipated to see a rise in occupancy levels again once jobs come back.
WPM: What’s the current mix between existing stock and new construction?  Is the multifamily real estate market in this region over- or under-supplied?
Muldowney: Coming out of the recession, there was a lack of liquidity. New construction across the U.S. fell to nearly 100,000 units per year, where normal rates might be 350,000 or more units per year. Now, we may be at 500,000 or more units coming out of the ground each year for the past few years.] Across the country we’ve been in construction mode. That’s not to say that the units are having trouble getting absorbed, because they are.
There is a problem the rising cost of construction, from supplies like concrete, steel, drywall, and lumber, to labor costs that have risen faster than the supply costs.  When you have 3% unemployment, it’s hard to find skilled construction workers. We are in need of an orderly immigration policy that brings skilled workers to our country legally.  Rising construction costs and the somewhat flat wage growth of renters are more frequently causing a break in the model that solves for a reasonable return on costs for developers/investors in new construction. As such, the pipeline of new construction should narrow in the future.
As the new construction opportunities narrow, investors turn to the older rental housing stock where there is an opportunity to buy below replacement cost, fix up the units in exchange for an increase in monthly rent.  This approach works well in jurisdictions where developable land is scarce and where there is a both a demand for quality housing and wages that support the rent levels for the upgraded housing.
Right now, there seems to be more interest in purchasing existing stock, where investors know there can be rent growth year over year. And DC and its suburbs are a major, well recognized gateway market for multifamily real estate. Baltimore, only 45 minutes to the north, sometimes gets overlooked, though we’re seeing opportunity there.
As for the region being over- or under-supplied, there seems to be a good balance in the long term.
WPM: How does the Mid-Atlantic compare to other parts of the country?
Muldowney: I would say the concentration of investor interest is the Southeast through Texas and through the Southwest.
The Mid-Atlantic market falls somewhere on the spectrum of between CA and NY – which are harder places to do business, so investors are coming to the Mid-Atlantic looking for opportunities.
Secondary and tertiary markets took it on the chin in the mid-2000s, but now they are in vogue, because there is renewed employment growth (e.g., Sales Force in Indianapolis) which begets a need for housing. Rents are not terribly high, so you have opportunity to increase rents as the economies in these secondary and tertiary locations grow. These would be places like Iowa, Indianapolis, Kansas City, Saint Louis, and Ohio - even Detroit is back.
WPM: What advice would you provide to a multifamily owner/investor purchasing an existing property?

Muldowney: We like to point to employment drivers, sustainability through thick and thin. Baltimore has lots of jobs in medicine and education, and those tend to stick around in recessionary times. Location relative to mass transit is critical, as gridlock continues. And of course, the “bones” of the property – how well constructed was the community, will the floor plans work with today’s demands?  For example, the old three bedrooms with one bath have limited potential for rent growth in today’s rental housing market.
WPM: What advice would you provide to a multifamily owner/investor considering a new construction project?
Muldowney: On the new development front, I’d explore whether the entire model fits the market – from a rent standpoint, a demand standpoint, etc. As a developer, I like the drivers created by the Bayview Medical campus more than being on the water; there’s simply more activity in those areas. In Highlandtown, rents average $1600 to $1700, much easier to fill than $2200 and up on the Harbor.
And look at where wages are heading for net new jobs. A tenant with a $55-60k per year income is more likely to go into Highlandtown than Harbor East or downtown.
Mike Muldowney is Executive Vice President with CBRE, specializing in multifamily property sales and concentrating on the Maryland suburbs of Washington, DC and the District of Columbia. His market knowledge expands throughout the greater Washington-Baltimore region. Learn more about Mike and his team at