By Josh Conley, Chief Operating Officer of New Haven Marinas.
During these financially volatile times, marina investments offer qualified investors* a great place to park their money with great upsides. Let’s look at what’s happening with multifamily and why you should seriously look at diversifying into marina investments.
Multifamily Market Trends and Concerns
For the past ten years, the multifamily real estate market has enjoyed a period of low-interest rates and favorable conditions. However, macroeconomics in recent months has changed these favorable conditions such that the multifamily sector is experiencing losses created by the oversupply of multifamily units, COVID-19-related shocks, and declining rents. Securing financing for multifamily has become much more challenging and more expensive, and when compared to marina investing, the numbers favor marina investments.
Let’s look at some of the downsides of multifamily investing and compare it to marina investing.
Oversupply of Multifamily Properties
The multifamily sector is struggling with an oversupply problem. A softening demand in multifamily rentals beginning in late 2022 coupled with an oversupply of new units is causing concerns in several regions of the U.S.
While there is a demand for new apartments, especially in the Sunbelt states where people migrated during COVID-19, more than 750,000 multifamily units are currently under construction. This represents the highest level of construction since the housing boom of the 1980s. As a result, units have been slower to rent or are remaining vacant longer than projected, leading to flattening or falling rents.
For investors, this prompts several obvious questions: How much is rent growth slowing, and what does it mean for passive income or returns?
In the marina sector, the issue is reversed. There is not enough supply and investor groups like New Haven Marinas are purchasing mom-and-pop marinas, investing in more dock spaces, sprucing up restaurants, and increasing net operating income for their partners.
Competition for Tenants is High in Multifamily
The over supply of new inventory increases the competition among landlords to fill their available spaces and motivates tenants to negotiate lower rental rates. Competing apartment complexes are offering new, cleaner spaces with modern appliances and modern, trendy amenities for equal or lower rental rates.
Marinas on the other hand, are experiencing a shortage of supply. The competition in the marina world is among boaters competing for available boat slips. In a recent article published in the New York Post (June 26, 2023), boaters are securing their boat slips before they purchase their boats. They don’t want to purchase a boat and not have a place to dock it. Due to the lack of marinas, boat slip rentals are a premium, and marinas on average experience 95%+ occupancy rates.
Lower vs Higher Cap Rates
Cap rates vary from market to market for different class properties; however, as of January 2023, the average nationwide cap rates for multifamily were 4.9% (MotleyFool). Forecasts for 2024 show those cap rates declining in 2024 (See chart courtesy of Statista).
As with other commercial real estate, marina cap rates vary widely by market, location, occupancy, profitability, class, and cash flow stability. Typical cap rates can range from 8% – 14%, with averages in the 9.5% – 10.5% range.
The benefit of a higher cap rate is that it offers investors the potential for a higher return and gives the investor room for unexpected costs such as increase in local taxes and unforeseen capital expenditures, making the marina investment much more lucrative than multifamily.
Increased Operating Expenses Decreases Landlord Profits
Rising operating expenses are decreasing profits for owners of multifamily. David Lynd, president and CEO of Lynd Living, an owner of multifamily properties since the 1990s with involvement in over 180,000 units, says today’s high levels of inflation is negatively impacting the profitability of multifamily assets. With 25+ years of experience, Lynd says, “This is the hardest operating environment I have ever seen” (MFE).
Operating expenses are up in most every category. According to Yardi Matrix data, national total operating expenses for multifamily properties increased 13% from 2020 to 2022. Landlords are being hit with massive increases in insurance, taxes, labor and rising interest rates, forcing property managers to sharpen their pencils to cut operating expenses.
With a marina investment, the property ownership of the marina and its dock storage is only one of many sources of revenue. Marinas benefit from the consortium of businesses at the marina, such as restaurants, gas docks, maintenance services, aquatic rentals, and RV parks. While inflation does impact all businesses, the array of revenue streams from the various businesses under the marina umbrella spreads the burden and helping to lift the bottom line.
Rental Rates Are Declining
Data as recent as October 2023, suggests that rental prices and demand for apartment rentals are on the decline. During the first three quarters of 2023, the U.S. rental market absorbed 250,000 new units, down from over 600,000 in 2021.
According to Yardi Matrix’s latest national multifamily report, ten of Yardi’s top 30 markets saw rents decline due to supply growth. The national average multifamily rent fell for the second month in a row, down $3 to $1,718 in October 2023. Experts attribute this nationwide drop to a building boom that increased supply and economic challenges among renters and lessened demand.
With the shortage of boat slips and the increase in boat sales, the demand for boat slips and their costs are rising yearly. Recreational boating saw a 35% increase in annual economic activity between 2018 and 2023, leaping from $170 billion to $230 billion, according to the National Marine Manufacturers Association. Numbers like these make marina investments an opportunity for growth income (NMMA).
Vacancy Rates Are Rising
Based on the expectation of a recession occurring in the fourth quarter of 2023 or the first quarter of 2024, Fannie Mae is forecasting a tempered outlook for the multifamily sector. Two major contributors to this projection are the current economic slowdown and the elevated supply of more than one million new multifamily units under construction. These will put additional stress on the multifamily sector, dampening rental demand and pushing up vacancies.
Fannie Mae reports that the U.S. national multifamily vacancy rate will rise to an estimated 6.0 percent by year-end 2023, which would take it above its estimated 15-year average of 5.8 percent. They expect that national vacancy rate to peak at 6.25 percent in 2024. However, we then expect it to decline to 6.0 percent by 2025 as economic conditions and job growth improve after the recessionary slowdown.
Since Covid-19 and lockdowns, Americans have begun prioritizing outdoor recreation, mental health and memorable experiences with close friends and family. This is a trend that is continuing and is good news for marina investors. “No vacancy” is an owner’s opportunity to improve the NOI of the marina with more boat slips.
Multifamily Property Values Are Declining
The multifamily sector, along with office space is experiencing some of the largest value losses in 2023. Based on data from repeat sales of commercial properties, the multifamily sector showed the largest annual and quarter-over-quarter price declines among the major property types in the three months that ended June 30, 2023 (CoStar Commercial Repeat Sale Indices).
According to Chad Littell, national director of U.S. capital markets analytics for CoStar and author of a monthly report on the indices, no region of the country has been spared. All four U.S. regional indexes fell into negative territory year-over-year for the first time during Q2 2023.
Marina property values are rising and are projected to increase substantially over the next five years (2023-2028). Marina revenue will grow at a CAGR of 1.0% to $6.9 billion through 2028, when profit will reach 18.5%. New Haven Marinas is seizing this opportunity by offering investors the ability to join this new wave of investments.
All posts are the opinion of the contributing author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CAIA Association or the author’s employer.
About the Author:
Josh Conley serves as the Chief Operating Officer of New Haven Marinas, where he plays a pivotal role in overseeing day-to-day operations and ensuring that the company's short-term objectives align with its long-term vision.
With over a decade of experience in business development and finance, Josh brings a diverse skill set to his role at New Haven Marinas. In his previous position as a registered representative at a local oil and gas firm, Josh contributed significantly to the syndication of over $200 million in oil and gas offerings across Texas, Oklahoma, Montana, and Colorado. During his time there, he was pivotal in the company’s growth from $12 million to over $50 million in annual revenues.