Multifamily demand boomed following the pandemic, driving rent growth in affordable markets that offered a lower cost of living for remote workers. But 2021 was what many would call an outlier year, and as the pandemic impact wanes while an onslaught of new apartment buildings comes to the market, the heat is tapering off.

“Multifamily is transitioning from demand significantly outstripping supply in 2021 to supply overwhelming the moderate demand currently in the marketplace,” said Jay Lybik, national director of multifamily analytics at CoStar. “This quick shift of fortunes has rent growth going from double-digit growth nationally down to around 5%. The issue is that supply — while tame nationally — skyrocketed in many of the fastest growing rental markets last year just as demand shifted into neutral.”

Despite those headwinds in top-tier cities, plenty of markets across the country still offer opportunities for entrepreneurial investors to get their foot in the door and become multifamily landlords in cities still posting double-digit rent growth and maintaining low vacancy rates.

LoopNet, CoStar's commercial real estate marketplace, relied on CoStar data to analyze property sales priced at $20 million and below to present the top 10 markets that non-institutional investors might want to consider when purchasing multifamily properties.

The analysis was based primarily on three key factors for multifamily investment:

· Liquidity: Liquidity refers to the ease at which a property can be traded for its market value. In this case, trade volume was determined using the total number of apartment sales under $20 million.

· Rent growth: Year-over-year (YOY) percentage rent increases from the second quarter of 2021 to the second quarter of 2022.

· Demand: Net absorption of units (change in occupancy) over 12 months, from the second quarter of 2021 to the second quarter of 2022. Demand is expressed as a percentage of existing inventory absorbed.

Our ranking also considered average asking rents (per unit across all unit types), risk of new supply, average cap rates and vacancy levels as of the end of the second quarter of 2022, using data gathered across all properties in each market. The 10 markets that emerged for multifamily opportunities under $20 million are:

1. Fresno, California
2. Dallas-Fort Worth
3. Salt Lake City
4. Madison, Wisconsin
5. Cincinnati
6. Tucson, Arizona
7. San Diego
8. Albuquerque, New Mexico
9. San Jose, California
10. Kansas City, Missouri

With much less construction than many gateway cities, our list, made up mostly of secondary and tertiary markets, stands out for its lack of new supply — which is a good thing, as it keeps vacancies low and still allows room for rent growth in areas that are already affordable, and therefore attractive, for renters.

“Due to the lack of new apartments coming online [in these markets], smaller existing deals typically make up the backbone of the rental housing market,” said Lybik. “Furthermore, the lack of new supply keeps rent growth stable both in the short and long run. You don’t see big swings in rents in [most of] these markets.”

For the second time, Fresno claims the number one spot on our list as the top market for multifamily investment. The Central Valley market has benefitted from a population influx since the pandemic, when remote workers sought a lower cost of living compared to the nearby cities of San Francisco and Los Angeles. The trend continues to drive Fresno’s strong rent growth of 8.9%.

While rent growth is slowing nationally due to the influx of supply across the country, “Fresno is still a relative exception to that,” said William Austin, a Sacramento, California-based director of market analytics at CoStar. Fresno’s tight apartment supply has also kept vacancy rates low: Fresno has the lowest vacancy rate on our list at 1.8%.

Even with high levels of rent growth and strong demand, Fresno still benefits from its affordability for renters. Average monthly rent here sits at just $1,325, compared to the national average of around $1,600, and comes at a significant discount relative to neighboring markets in the state.

“For comparison, Sacramento is also an affordable city by California standards, but the average rent there is about a hundred dollars above the national average. That’s not too bad, but we are talking about an extremely affordable market in terms of housing costs in Fresno,” said Austin. “With that said, they are still seeing rent growth while we are in an inflationary period.”

Because Fresno’s affordability is what makes it an attractive market for residents, Austin warned investors to be mindful of not increasing rents too sharply, especially when making value-add plays.

“Pushing rents right now might be difficult in terms of keeping your current residents or attracting new ones. Part of the reason why rents are low in Fresno is because the income base isn’t there to support higher rents. So, there is a give and take — if you're betting on multifamily in Fresno, in part you're betting on Fresno [as a market],” he said.

Still, investors can likely find opportunities here for a stable investment with growth potential.

“Pricing is almost $100,000 per unit below the national average. Fresno has affordable units with low rents at a point in time where having low rents is certainly a differentiator,” said Austin. “That creates an environment where you're able to get more units, which increases your net operating income (NOI) and makes for a better investment overall.”

Metrics:
Liquidity: 39%
Vacancy: 1.8%
Demand: 0.9%
Rent Growth: 8.9%
Average Rent: $1,325
Cap Rate: 6%

A city that stood strong both before and throughout the pandemic, and led the nation’s return to the office, Dallas’s economic stability and robust job market present an attractive opportunity for investors.

“Dallas-Fort Worth was one of the first of the largest markets to fully recover its jobs from the pandemic. The city is up over 240,000 jobs (up 7.5% of the employment base),” said Bill Kitchens, a Dallas-based director of market analytics at CoStar. “We have on average about 100,000 people moving here annually, a large portion of which are moving for job opportunities.”

The supply pipeline of high-end apartment buildings here is high, but strong demand for apartment rentals, especially in the current economic landscape, continues to drive rent growth of 12.8%.

“Given how quickly we're seeing interest rates rise, those that may have been able to qualify for a mortgage a year ago will now likely stay in their rental unit longer, so that’s boosting renter retention,” said Kitchens.

Dallas’s relative affordability, with rents of $1,534 in line with the national average, and properties for sale at an attainable price point also bolsters the market’s viability.

“On the pricing side, Dallas comes in much lower than many other markets. The average price is just under $200,000 per door, which is still attainable for some investors,” said Kitchens. “Dallas is certainly still seeing a lot of appreciation, but buying here is still less expensive than in some of the coastal markets. There’s even still a slight discount to other markets such as Atlanta or Austin.”

Metrics:
Liquidity: 37%
Vacancy: 6.4%
Demand: 3.1%
Rent Growth: 12.8%
Average Rent: $1,534
Cap Rate: 5.6%

At 13.7%, Salt Lake City ranks as the market with the highest rent growth on our list. The Utah city popularly known as “The Crossroads of the West” benefits from population growth-driven demand as people move to Salt Lake City for the quality of life, outdoor activities, relative affordability and jobs in an emerging technology hub.

Salt Lake City wasn’t hit as hard by the pandemic as other markets in the country, said Michael Petrivelli, a director of market analytics at CoStar. “Especially in terms of job losses, which were minimal and not nearly as bad as the national average. The recovery has been strong — Salt Lake City is up by about 25,000 jobs from pre-pandemic employment levels. Even with a good amount of building here, a lot of the supply pressure has been mitigated by a strong demand that's driven by in-migration.”

A healthy amount of new construction of about 9,000 units in the pipeline as of Q2 2022 is pushing up vacancies in Salt Lake City, but Petrivelli noted that the current 6.2% vacancy level is in line with the city’s historical average.

Smaller investors can find abundant value-add opportunities in Salt Lake City’s Sugar House neighborhood, said Petrivelli, an “up-and-coming area” where there are “a lot of older homes and apartment buildings that need some love.” The neighborhood sees a lot of demand as it’s one of the few areas that is still walkable even though it’s in the inner suburbs.

“The value-add investment here is generating high returns, not only in terms of what you can sell it for after you rehab it, but also the rent growth that you're able to generate by pushing rent after the rehab,” added Petrivelli.

Metrics:
Liquidity: 47%
Vacancy: 6.2%
Demand: 3.5%
Rent Growth: 13.7%
Average Rent: $1,591
Cap Rate: 5.1%

At 5% net absorption, Madison boasts the second-highest demand among the the 10 markets. The University of Wisconsin-Madison contributes greatly to the city’s strong demand, as do the government jobs in the Wisconsin state capital and the burgeoning biotech industry and health sectors.

“Madison is the fastest growing city in Wisconsin with a 16% growth rate between 2010 and 2020, and it ranks up there with some of the fastest growing metros in the country,” said Gard Pecor, a Milwaukee-based senior market analyst at CoStar. “There's going to be a significant long-term positive demand in Madison, and there are no signs that it's going to slow down anytime soon.”

Madison’s demand holds strong even in the face of new construction, as it’s an affordable option for renters. The average rent here is $1,350, compared to the national average of around $1,600.

“Madison provides a lot of the benefits that come with a fast-growing metro in the Midwest — strong employer growth, high-paying jobs, and a high education level — with an active, outdoor lifestyle,” Pecor said. “We're getting a lot more out-of-state investors and developers as well looking to diversify their portfolios away from some of the major markets [in favor of] a more stable mid-size market. The trajectory Madison is on is a positive one.”

Metrics:
Liquidity: 27%
Vacancy: 2.5%
Demand: 5%
Rent Growth: 5.7%
Average Rent: $1,346
Cap Rate: 6.1%

For entrepreneurial investors new to buying property, Cincinnati presents an attractive entry point into the market, said Elizabeth Ptacek, a Cleveland-based senior director of market analytics at CoStar. “You can get a lot for your money here, and you’re not competing with a lot of other investors.”

Cap rates here are high at 7.7% while prices are low, offering high return potential. The Cincinnati market reported double-digit rent growth (10.5%) over the past year, while still maintaining affordable rents at $1,127 for residents. Ptacek warned that Cincinnati is a tricky value-add market, especially as rent growth slows nationally due to so many new apartments coming online.

“I think the one-, two-, and three-star properties will hold up somewhat better and could still see some growth, but if four- and five-star rents come down, that limits the ability of a three-star property owner to raise rents,” she said.

As an affordable market, construction and development here have remained low, as “the rents and the potential for rent growth don't justify the cost of development,” explained Ptacek. “But purchasing an existing building would give you a good return. Cincinnati’s market is tight.”

A majority (85%) of the properties here are one-, two- or three-star assets.

Metrics:
Liquidity: 27%
Vacancy: 4.1%
Demand: 1.1%
Rent Growth: 10.5%
Average Rent: $1,127
Cap Rate: 7.7%

Still riding its pandemic-spurred wave of population growth, Tucson attracts residents from across the southwest for its affordability (average rents here are $1,100). “Tucson is a big beneficiary of a lower cost of living. The rents are about 40% higher two hours away in Phoenix for a comparable product. If you expand that over the course of an entire year, it's close to $5,500 per year in rent savings for someone,” explained Connor Devereux, a Phoenix-based director of market analytics at CoStar.

In the face of record inflation levels, that affordability is a huge draw for renters. Tucson also benefits from a strong employment base supported by the University of Arizona, government jobs and an Air Force base.

“Tucson has the unique advantage of small-town affordability with mid-size market employers and population,” said Devereux.

Tucson is not immune to the national trend of slowing demand, and rising vacancies, after 2021, but “one thing that it benefits from is that it didn't see the same level of construction as other major markets,” Devereux said. “In Tucson, the pipeline is waning, and they’ve done a good job of not overbuilding. Some of that is caused by the higher cost of construction, which makes it difficult to build in a market with lower rents.”

Since there isn’t much new construction in this market, most of the existing properties were built before the 2000s and are one-, two- and three-star buildings, said Devereux.

“Tucson is very attractive for investors who are looking for something at a lower price than other major markets. It has higher yields than Phoenix — average cap rates are 6.1% in Tucson but 5% in Phoenix,” said Devereux. “So as interest rates increase and the cost of capital rises, finding higher yields becomes more important for investors.”

Metrics:
Liquidity: 42%
Vacancy: 6.4%
Demand: -0.4%
Rent Growth: 11.4%
Average Rent: $1,100
Cap Rate: 6.1%

With the second-highest rent growth (13.5%) coming in right behind Salt Lake City, San Diego’s rental market is bolstered by its exceptionally strong job market backed by the biotech industry and a large military presence with over 140,000 active-duty personnel, so “you have entrenched demand,” said Josh Ohl, a San Diego-based director of market analytics at CoStar. “With San Diego having one of the biggest biotech markets in the country, you have high-paying jobs that [enable employees to] afford apartments of any price. That’s generally what's driven commercial leasing activity.”

In a supply-constrained market where opposition to building is fierce, said Ohl, the low inventory helps to keep demand high, but can also pose a challenge for investors when it comes to finding a property to purchase. He suggested there might be opportunities in the value-add sector.

“The value add component is a very popular vehicle because we have so many older, 60s, 70s, and 80s vintage properties that have had passive ownership over the years and are ripe for investment,” he said.

At the $20 million price point, Ohl said investors are most likely to find opportunities in the city’s suburban areas, which have “transformed over the past 10 to 15 years from an exit off of the freeway to neighborhoods that now have quaint downtowns with farmers' markets, festivals, good restaurants, hiking trails, and those sorts of elements that drive demand and investor interest. Those areas are also more affordable, and the hybrid approach to work is adding to the demand for suburban apartments.”

Ohl also noted that the beach areas of the city see strong demand. “Beach communities are less prone to [economic] ups and downs because there's always high demand for living at the beach.”

Metrics:
Liquidity: 35%
Vacancy: 2.7%
Demand: 2%
Rent Growth: 13.5%
Average Rent: $2,347
Cap Rate: 3.9%

Well before the pandemic, Albuquerque had steadily positioned itself for stability after lessons learned from the Great Recession.

The degree to which “it struggled coming out of the Great Recession was a wakeup call for city officials in the area. Since then and in the years leading up to the pandemic, the city did a great job of focusing on the kind of industries that they wanted to bring in and the existing ones they wanted to strengthen,” said Jeannie Tobin, a Denver-based director of market analytics at CoStar. “They were very targeted in their approach.”

The city now benefits from a thriving aerospace industry, an Air Force base, government-funded labs, Facebook data centers, and even Netflix and NBC film production studios. “They were very targeted in their approach of bringing in these high-paying jobs and it’s paying off. So of course, that benefits the multifamily market,” said Tobin.

Like many of our other markets, the city’s affordability is also a big driver in drawing in residents. Rents here are $1,131, and the market is still seeing double-digit rent growth of 12.8%.

“Albuquerque was a winner coming out of the pandemic. Early on in 2020, a lot of people moved there to work remotely,” said Tobin. But she cautions investors that as companies return to the office and shift into more hybrid work schedules, “that could potentially draw residents back to the main employment centers in California or wherever they moved from” as they sought a lower cost of living.

Metrics:
Liquidity: 33%
Vacancy: 4.9%
Demand: 0.1%
Rent Growth: 12.8%
Average Rent: $1,131
Cap Rate: 6.3%

With the strongest demand (5.2% net absorption of existing inventory) of any market on our list, San Jose presents a lucrative opportunity for investors in a market that always has demand from the strong technology job market, plus limited supply keeping vacancies low at 4.2%.

“You have a lot of small properties that were built in the 60s, 70s and 80s, and those types of properties just stay full because there is such limited inventory,” said Lybik. “They can be cash cows for investors.”

Like many California markets, similar to San Diego discussed earlier, San Jose is hard to build in. But this can benefit investors looking for a property under $20 million.

“You don’t have to worry about overbuilding in San Jose, and you especially don’t have to worry about overbuilding of buildings with a smaller number of units — they’re just not being built, so there will always be demand,” said Lybik. “What is being built is higher end, and it’s at a price point that doesn’t compete with this type of smaller unit property at a price under $20 million.”

Lybik warned that while there is strong demand in San Jose, the market can also easily experience volatility with the technology sector serving as its main source of employment.

“If there is some sort of disruption in tech employment, it hurts San Jose the most. That’s the main risk — you have a strong market, but it also has the potential for high volatility,” he explained.

Metrics:
Liquidity: 44%
Vacancy: 4.2%
Demand: 5.2%
Rent Growth: 11.3%
Average Rent: $3,022
Cap Rate: 3.7%

At number ten on the list, Kansas City might not be on investors’ radars, but Brandon Svec, national director of retail analytics at CoStar, said that lack of attention may be advantageous for those seeking a city with high growth potential yet low barriers to entry.

“It’s a growth market that's consistently seen twice the rate of population growth relative to the U.S. average and it is one of the fastest-growing metros in the Midwest. But it doesn't get targeted by a lot of new development money or bid on by capital from the coasts,” said Svec.

Kansas City reports “consistent, strong demand formation,” he continued, due to population growth from in-migration. “Kansas City is a big enough market to be liquid [and present buying opportunities for investors], have a self-sustaining economy, and attract people to the region with jobs.” Svec added that despite these strengths, they are not yet “seeing a lot of oversupply like some of the Sunbelt markets, where cap rates get bid down into the 4% range.” Cap rates in Kansas City are 6.7%.

With sparse development, there are a fair amount of garden-style, 90s-built apartment buildings which enables a smaller investor to “buy something for about $115,000 per unit and make improvements to raise the value. Overall, the existing stock is a mix of primarily low- to mid-rise, suburban garden-style [structures],” said Svec.

He noted that the market is a particularly resilient one and good for “hiding out during a recession.” With 13% of employment coming from government jobs, Kansas City’s job market is less prone to economic volatility.

“It's pretty much been a Steady Eddie market that hasn't been overbuilt or overbought, and it has demonstrated good resiliency during downturns in the past,” he said.

Metrics:
Liquidity: 28%
Vacancy: 5.9%
Demand: 3.9%
Rent Growth: 8.6%
Average Rent: $1,183
Cap Rate: 6.7%

Of course, while these markets present fundamentals that make them good opportunities for investment, buying indiscriminately within these markets does not guarantee success. As always, investors should conduct their own due diligence when it comes to purchasing a property, thoroughly evaluating the overall market, neighborhood, and specific building before deciding to invest.