Alternative Investments Are Not Created Equal: The Case for Multifamily Properties
- Ethan Penner
- Jul 25
- 4 min read
By Ethan Penner, Chairman, Hill Street Realty
Real Estate Visionary | Author | Educator | Thought Leader | 2025 California Governor Candidate
The Arbitrary Origins of “Alternatives”
The term “Alternative Investments” gained traction in the 1990s, used to describe assets that weren’t publicly traded stocks, investment-grade bonds, or cash. Likely coined by those promoting mainstream products, the label framed alternatives as riskier and only suitable for small portfolio slices. A 3–5% allocation was considered aggressive at the time. That thinking shifted with the influence of David Swensen at Yale, whose pioneering endowment model increased allocations to 10%, 15%, and even 30% or more among forward-thinking institutions.
A Bloated and Broken Category
While institutional appetite for alternatives expanded, the definition failed to keep pace. Today, the “alternatives” label encompasses a disparate range of assets—some illiquid, some speculative, others fundamentally stable. Treating them as a single category reflects lazy portfolio thinking.
Consider the facts:
In 1996, there were over 8,000 publicly traded U.S. companies; today, there are around 4,000 (World Bank, Wilshire).
Private equity-backed companies now exceed 100,000 in the U.S., spanning startups to mature middle-market businesses.
A majority of the investable universe now lies outside public markets, yet traditional frameworks continue to marginalize it.
Multifamily real estate doesn’t belong in the same bucket as moonshots or meme coins. Its income-producing, risk-adjusted profile merits its own classification—and often, a larger allocation.
Multifamily: A 30-Year Case Study in Stability
Over the past three decades, U.S. multifamily real estate has produced average annual returns of 8.8% (NCREIF). This return profile rivals that of equities while exhibiting significantly less volatility. Its Sharpe ratio reflects dependable, cash-flow-driven gains rather than speculative appreciation. During the Global Financial Crisis, values declined only about 10–12% and recovered quickly. In the COVID-19 downturn, national occupancy remained above 93%, and rents bounced back within a year. Few asset classes demonstrate this kind of resilience across economic cycles.
Inflation Protection in Real Time
One of multifamily’s strengths is its ability to adapt quickly to inflation. Most apartment leases reset annually, some even sooner—unlike commercial leases, which may stay fixed for five to ten years. This gives landlords the flexibility to raise rents in response to inflation. In 2021, when CPI inflation reached 7%, national multifamily rents rose by 13.5% (Zillow), with increases topping 20% in cities like Phoenix, Tampa, and Austin. That level of responsiveness offers real-time inflation hedging unmatched by long-term bonds or closed-end private equity funds.
Leverage That’s Actually Sustainable
Multifamily portfolios typically employ conservative leverage—around 60–65% loan-to-value—supported by consistent rental income. This approach contrasts sharply with high-risk debt structures used in other sectors, such as private equity buyouts at 8–10x EBITDA. Historical CMBS delinquency rates for multifamily loans have stayed below 1.5%, even in downturns. By comparison, hotel and office loans saw 7–8% delinquency rates during COVID-19. Moreover, rising interest rates often coincide with rent growth, which helps offset financing pressures. With fixed-rate, amortizing debt and interest rate caps, multifamily portfolios are built to endure market shocks.
Long-Term Demographic Tailwinds
A Smarter Allocation Strategy
To understand multifamily’s role in a diversified portfolio, compare two investors:
Investor A allocates 15% of their $10 million portfolio to venture capital and crypto. These assets are illiquid, volatile, and difficult to value.
Investor B allocates the same 15% to a diversified pool of low-leverage, cash-flowing multifamily properties. They receive steady distributions and inflation-responsive income.
Investor A is betting on future alpha. Investor B is already collecting it. This isn’t a dismissal of innovation, it’s a reminder that alignment between investment structure and financial goals matters. For investors seeking income, capital preservation, and resilience, multifamily stands out as one of the few “alternatives” that arguably deserves a core position.
Multifamily is a Core Holding, Not an Alternative
It’s time to retire the one-size-fits-all “alternative” label. It made sense in the 1990s, but it’s outdated now. Multifamily real estate is not a fringe asset—it’s a proven, essential, income-producing investment that belongs at the center of more portfolios. It generates real cash flow, offers inflation protection, benefits from structural demographic trends, and performs well with modest leverage. In an environment increasingly driven by speculation and volatility, multifamily offers something rare: clarity, consistency, and common sense. Let others chase unicorns.
Disclaimer: This article is for informational and educational purposes only and should not be construed as investment advice or a solicitation to buy or sell any securities. All investments involve risk, including potential loss of principal. Past performance is not indicative of future results. Investors should consult their own financial and legal advisors before making any investment decisions. The views expressed are those of the author and do not necessarily reflect the views of any affiliated organization.
