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Real estate remained an unsteady market in 2023, squeezed by high interest rates, reduced home starts compared with 2022, and a commercial class still resettling from the pandemic’s aftershocks. However, veteran real estate professional Michael Zaransky pointed to a continued highlight for investors and operators: multifamily real estate.

“It’s one of the few bright, shining stars of the commercial investment real estate market at the moment,” said Zaransky, founder and managing principal of MZ Capital Partners. “Multifamily is viewed by most investors, including sophisticated institutional investors, as the preferred asset class. We’re not experiencing the same issues as office space for demand and vacancy.”

MZ Capital Partners, Zaransky’s firm based in Northbrook, Illinois, has specialized in multifamily housing for more than three decades. Zaransky is an expert in the field, having written a book about investment strategies in student housing, and his firm now pursues property acquisitions in high-growth markets. Recently, MZ Capital Partners purchased a community of 87 single-family rental homes in West Knoxville, Tennessee, combining a market and template representing the future of multifamily real estate.

Success in the sector, Zaransky said, requires understanding and committing to what’s next.

“The main things are agility, the ability to spot emerging trends, and to adjust methods of execution based on the changing environment you’re in,” Zaransky said. “Techniques and principles that mattered 10 years ago need to be adapted to today’s reality. Agility and the ability to change are fundamentally important.”

Multifamily Real Estate: A ‘Resilient’ Market

As Zaransky often reminds investors, “everyone needs a place to live,” making multifamily housing less vulnerable to inflation and economic shifts. During the pandemic, it thrived as a sector while some commercial real estate classes suffered. The market generates more liquidity, has higher rates of appreciation, and benefits from the Tax Cuts and Jobs Act — at least until it expires in 2025. As a result, Zaransky said multifamily real estate has provided more growth opportunities than other sectors. Those in other real estate classes sidelining capital might consider investing in multifamily housing.

“We’re very active in the market and have a strong pipeline of existing properties that lend themselves to value-add purchases,” Zaransky said. “We think there’s a buying opportunity right now.”

However, Zaransky cautioned property managers to maintain discipline when considering major purchases, renovations, or upgrades. Federal Reserve Chair Jerome Powell said in late December that, as the inflation rate lessens, the Fed likely will lower interest rates in 2024. That could reduce apartment occupancy rates, as renters become homeowners, and release more inventory. 

“We can’t count on sustained rent growth, but we’re sure we can count on continued escalation of expenses,” Zaransky said, “so we’re being cautious.”

Being Cautious About Costs

According to the National Multifamily Housing Council, the pressure of property insurance costs “reached a new level of intensity” in 2023, as rates rose 26 percent in one year. Insurance represents the “single biggest problem” confronting property managers, Zaransky said, but it’s far from the sole issue. Expenses are escalating across the board. Zaransky offered a few suggestions:

• Price new insurance policies: Some property owners accept increased deductibles as the workaround for rising rates. Instead, they should shop for new carriers.
• Consider appealing tax assessments: Property values and taxes have fluctuated since the pandemic. Appealing a property tax assessment might provide tax savings.
• Revisit vendor relationships and pause non-essential projects: Managers with long-time contractors and vendors still should invite multiple project bids to strike competitive deals. Further, they should delay less important work until budgets can sustain them.
• Prioritize preventative maintenance: Every property should develop, and adhere to, a regular maintenance plan. It’s the best way to maintain a healthy property, avoid costly repairs or replacements, and ensure renter retention.

Embracing Technology

Zaransky said that technology has changed virtually every aspect of the rental experience. Today’s prospective renters seek more than two bedrooms, upgraded kitchens, and a pool or playground. They require tech as well.

“During property tours, one of the first things we notice is that people turn on their phones in the common areas to see how well the WiFi works,” Zaransky said.

As a result, Zaransky said, multifamily managers must equip their properties with the latest PropTech (or property technology) tools. Prospective renters want to tour available apartments using AR/VR tech. They want to sign leases with smart contracts, pay rent online, and use apps to make maintenance requests. They want to control property gates, door locks, and home appliances via an app. Most importantly, they demand high-speed internet at move-in.

“What’s really interesting is that we can incorporate every part of the rental experience on every resident’s smartphone,” Zaransky said. “It has no end.”

Fostering Relationships

Digital deal-making is essential in real estate, but Zaransky still prefers negotiating and agreeing to contracts in person. He regards personal relationships as fundamental to multifamily real estate. Whenever possible, Zaransky schedules a celebratory dinner to close a deal.

Particularly for young investors and property managers, learning to communicate and negotiate in person is essential. Zaransky recommends that newcomers to multifamily real estate meet brokers and investors personally, gauge their expertise, and cultivate two-way conversations. This builds trust that the digital world can’t offer, Zaransky said. It also forms the foundation of a successful real estate firm.

“Show up on time, ask thoughtful questions, respond with timely and accurate answers, stay in touch, and say thank you,” he said. “The simple things do still matter.”

Zaransky expects 2024 to be a positive year for the multifamily housing sector, though economic forces could affect that. If inflation outpaces wage growth, or the Fed lowers interest rates substantially, that could suppress demand. Overall, though, Zaransky believes multifamily real estate will remain a strong investment.

“We’re projecting continued high demand for rentals and we actually see more opportunities in suburban markets than in the central core cities,” Zaransky said. “We’re very bullish on the future of multifamily real estate.”

Published by: Nelly Chavez