How Big is Small Cap Multifamily?

A closer look at the multifamily housing inventory in the United States and the size of the small cap investment opportunity.

Rental buildings in the United States cover a wide range of properties, varying in terms of location, size, amenities and a host of other dimensions. While there is no formal definition, the small balance market as defined by many lenders includes loans between $1 million and $5 million. For buyers, we can also group properties by price or the number of units in the building.

In the latter case, we define small-cap multifamily properties as those with 5 to 19 units. Medium-cap properties have 20 to 49 units. Large-cap properties have 50 or more units. Depending on prices in any particular market, both small- and medium-cap properties may fall within the scope of small balance apartment lending.

The inventory of US multifamily properties has grown at a brisk pace in the aftermath of the housing crisis. Although attention has tended to focus on investment and development of large rental property — weighted to high-rise buildings in the urban core that offer a rich array of amenities — the overwhelming majority of multifamily assets in the United States have fewer than 50 units. Between 2012 and 2014, the number of apartments in small-cap properties, including buildings with between 5 and 19 apartments, increased by nearly 5 percent, faster than the mid-cap or large-cap segments of the market.

Sizing the Small Balance Market

There were 117.3 million housing units in the United States in 2014 according to the American Community Survey (ACS), the largest regular survey conducted by the Census Bureau after the decennial census itself. Of that measure of the total housing stock, which includes the full range of residential properties from single-family homes to the largest high-rise apartment buildings, 63.1 percent of units are owner-occupied; the other 36.9 percent, numbering 43.3 million, are houses and apartments occupied by renters.

The nation’s rental units are dominated by one-unit buildings and the very smallest multifamily properties, including those with just two to four units. That still leaves an enormous inventory of 18.3 million properties with five or more units. As illustrated above, more than half of all of those properties have fewer than 20 units and fall into the small-cap segment of the market; a further 20 percent fall into the medium-cap segment, with under 50 units. Overall, more than one in ten American households live in a rental property with between 5 and 50 apartments.

Growth in the Small Cap Market

In responding to demand from Millennial renters, developers have focused their attention in the years following the housing crisis on the preferences and constraints of this largest demographic group. Chief amongst the considerations have been Millennials’ preference for urban areas, proximity to food, entertainment, and cultural venues, and buildings of sufficient size and scale to support a wide-range of amenities. Add to those drivers, the “trigger events” that lead many renters to become homeowners, including marriage and child-rearing, are occurring later in the household lifecycle.

Capturing prevailing trends and preferences in rental demand, development activity has been over-weighted to large cap multifamily properties, including buildings with 50 or more units. The inventory of apartments in in this segment has grown by 18.0 percent over the ten-year period ending 2014, compared with 15.2 percent for medium-cap properties and just 8.5 percent for small-cap. Nonetheless, the last several years have seen the market break from the longer-term trend. Between 2012 and 2014, growth in the small-cap segment of the market accelerated, outpacing the tally of completed development projects for new medium- and large-cap properties. The shift likely reflects the robust pipeline of urban projects already underway and demand that has gone unmet for new units in smaller and less urban buildings.