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IS THE TROPHY ASSET STILL WINNING?

Evaluating relative multifamily performance by property class through and after
the Covid-19 pandemic.

Class A buildings have historically carried higher valuations – not only on a
price-per-unit basis but as a multiple of earnings, as shown by lower cap rates.
These higher multiples would only be justified to the extent Class A buildings
provided higher returns via excess growth or carried lower volatility and risk.
The past few years have proven that this cannot be taken for granted, and that
the best-performing class is a function of the market environment.

Key Takeaways: 

 * Over the past three and a half years, Class A has been particularly sensitive
   to changes in the underlying market.  In tightening markets – where demand
   outstrips new deliveries – Class A showed the strongest rent and income
   growth.  In loosening markets where supply outpaces net absorption, Class C
   is the best performer.  Showing neither extreme, Class B exhibited the best
   cumulative performance through the period studied.
 * Class C shows the most property-level uncertainty, owing to higher and more
   unpredictable expenses.  This may be less of a concern for owners with large
   portfolios.
 * Class A’s pricing premium has eroded over the past few years, shown through a
   tightening basis in cap rates. 
 * This sets up a way for investors to trade their convictions.  Those who are
   bullish on rental market fundamentals or who expect the basis in cap rates to
   revert to historical norms may favor Class A.  Those less optimistic about
   multifamily versus single-family may choose Class C.


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