Stock prices go up and down, sometimes a whole lot. They are volatile. A painful example is the 2008 recession and the dramatic dip in stock prices. Other investment classes also have a lot of volatility — big ups and big downs.
Commercial Multifamily Assets have a history of much lower swings in prices. These swings are measured as volatility, how high they go up and how far they go down.
Like every other asset class, there are cycles. Inflation and interest rates and unemployment and other external forces do have an effect on the values of multifamily properties. And local forces, such as new employers or an employer leaving an area can change values in individual markets.
But, as a whole, this asset class has low volatility. This means values do not take large swings, as they do in some investments. It is much more stable.
This low volatility is good.
As we have learned by experience and the math proves, it is harder to recover from the loss years. It can be quite painful to have to liquidate during the big down cycles of volatile investment instruments.
The “Sharpe Ratio” is a way to measure the combination of volatility and return on investment across various asset classes.
Dr. Dennis Bethel of 37th Parallel notes the following graph from The US Treasury data, that shows the Sharpe Ratio over the last 20 years for NPI to be the best among others classes such as Corporate Bonds, Large Cap Stocks, Small Cap Stocks, and other major asset classes.
This means there is 3 to 4 times less volatility in Commerical Multifamily Real Estate, according to Dr. Bethel. (NPI is The National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index (NPI) the accepted index created to provide an instrument to gauge the investment performance of the commercial real estate market.)
Commercial Multi-family — a better sector
We find apartments or the Commercial Multifamily Asset to be the better sector within the commercial space.
Multi-family wins with long-term return on investment and overall stability of the investment. We also appreciate the efficiencies of the larger multi-family properties we own. We cover return and relative safety in other articles. See Return of Investment, Steady Return , Low Volatility .
The multifamily space, as an asset class, has proven itself over time and promises to have a long life well into the future. Why? Because shelter is a basic, foundational necessity in life.
Those who study history, who understand the forces of supply and demand, who know the difference between basic needs and changing preferences see strength in the Commercial Multifamily sector for decades to come.
Continuing Demand for Apartments
Unlike many other investments, Commercial Multifamily isn’t going away. Safe, affordable housing meets a basic need. It serves a steady, proven demand. This gives it stability and even steady growth over time.