While the single-family housing market remains stagnant, demand for apartments is on a tear, making the multifamily segment very attractive for nontraded REIT investors, say executives at Orlando-based CNL Financial Group.

Jeff Shafer, group president of CNL Securities Corp., who is responsible for CNL's capital-raising activities, says CNL looks for alternate real estate assets that can produce growth and capital appreciation.

"Suddenly, you have a tremendous demand for multifamily units," says Rick Coe, chief investment officer at CNL Financial Group. "In the past year, the vacancy rate of multifamily housing slipped to 5.2 percent compared to a historical average of 6.5 percent to 7 percent."

Coe says the burgeoning demand for rental housing is fueled in part by baby boomers' offspring, dubbed "echo boomers," who either cannot afford to own a home, or prefer not to buy one. The rental boom, he says, is also a major bi-product of the 2008 financial market crash that has pushed echo boomers, baby boomers and others to pass on or get out of the housing market. "The supply and demand metric for multifamily housing has shifted over the last four to five years," he noted.   

The echo boom generation typically rents housing for three to seven years before purchasing a home. "Many of them prefer the flexibility and the liquidity of living in an apartment and not having to put down large down payments and pay mortgages by buying a home," Coe said.

Home ownership has declined from slightly more 69 percent in 2005 to an estimated 66 percent today. A significant chunk of that shrinking home ownership is coming from longtime homeowners who no longer can afford their homes, Coe says. "Every percentage point represents a million homeowners who are now renters," Coe said.  "The echo boom and the decline in home ownership have really created this rental housing demand."

CNL hopes to capitalize on the demand for multifamily housing with its REIT, Global Growth Trust Inc. (GGT), which will fund construction of multifamily rental housing complexes in select markets across the country. It also continues to make investments in other properties, such as office spaces. 

Coe says the REIT plans to build five to seven luxury-styled complexes over the next two years that feature resort-style pools, club houses and workout facilities. GGT has already broken ground for two complexes: a 297-unit in Charlotte, N.C.; a 258-unit complex in Mount Pleasant, S.C.; and will break ground for a 344-unit complex in Tampa in early-to mid-April. Other potential markets include Dallas, Houston and Austin, Texas; Raleigh-Durham, N.C. It will bypass more developed areas like New York City.

"We build where the job growth is," Coe said. "Job growth drives (housing) occupancy."

GGT produces an 8 percent stock dividend rather than a cash dividend annually, which frees up capital for multifamily development. Historically, the average GGT investor has $30,000 invested in the trust. GGT, says Coe, has the ability to create growth on a tax advantaged basis. "That because the stock dividend does not get taxed until you sell your shares. You can re-invest in a growth vehicle without paying the current tax associated with the dividend."

In an effort to stay profitable, Coe says, GGT only develops in markets where the capitalization rate is 8 percent or higher. "We need to be developing at returns in excess of that eight percent just so we don't dilute the early shareholders in the REIT who can buy at eight percent or greater yields," Coe said.

Coe says the average cap rate in the market today is 6.5 percent for class A multifamily properties across all geographic regions. "In New York City its 3.5 to 4 percent for existing multifamily properties; Washington D.C. is averaging about 4.5 percent. That's just not going to be accretive to a shareholder who is getting an 8 percent dividend."

Coe notes the demand for multifamily housing won't always be this strong. "We expect the market to be cyclical," Coe said. "Every real estate class works in cycles. Multifamily vacancy rates right now are conducive to running rental rates up to capture value in multifamily. But then it will attract a lot of development capital and eventually supply will catch up with demand and it will have to cycle down."

Coe says GGT estimates a two- to 4-year window before supply catches up with demand. "We want to move in at the front end of the development cycle and exit it before it reaches its peak, then look at the next asset class that we can invest in."

CNL Financial Group's platform consists of four REITs and one business development company. CNL Healthcare Trust is a non-traded REIT that focuses on investing in senior housing and healthcare properties.

-Jim McConville