Alternative Investments Are Not Created Equal: The Case for Multifamily Properties

By Ethan Penner

The Arbitrary Origins of “Alternatives”

It was sometime in the 1990s when the term “Alternative Investments” became fashionable. The phrase was intended to imply all things not named publicly traded stocks, investment-grade bonds, or cash. I’m fairly certain it was coined by the marketers of stocks and bonds—likely with the help of a few academic allies—whose goal was to cast everything outside the mainstream as inherently riskier, and therefore only worthy of a token portfolio allocation. Back then, 3–5% was the standard recommendation for alternatives, and even that seemed generous. But then came David Swensen at Yale, whose endowment model pushed that figure toward 10%, 15%, and eventually 30% or more among the bolder institutions.

A Bloated and Broken Category

As allocations to alternatives grew over the past three decades, the definition of “alternative investments” never matured. Today, the label covers everything from crypto to timberland, CCCrated debt to stabilized apartments—assets with vastly different risk, liquidity, and income characteristics. Grouping them together is lazy portfolio construction.

Consider the facts:

• In 1996, there were over 8,000 publicly traded companies in the U.S.; today, there are around 4,000 (World Bank, Wilshire).

• Meanwhile, the number of private equity-backed U.S. companies exceeds 100,000, encompassing venture-backed startups and middle-market operating businesses.

• This means the majority of the investable opportunity set now exists outside public markets—yet traditional portfolio frameworks still treat these assets as peripheral.

It’s time to rethink how we classify and allocate to real assets. Multifamily real estate, in particular, offers a track record, income profile, and structural risk characteristics that set it apart from speculative or illiquid investments. It doesn’t belong in the same bucket as memecoins or moonshots. It deserves its own category—and, in many portfolios, a larger role.

Multifamily: A 30-Year Case Study in Stability

Over the past three decades, U.S. multifamily real estate has delivered an average annual return of 8.8%, according to NCREIF—outperforming bonds and approaching equity-level returns, but with far less volatility. Its strong Sharpe ratio reflects stable, cash-flow-driven performance, not speculative appreciation. During the Global Financial Crisis, multifamily declined modestly (~10–12%) and recovered quickly, unlike office or retail. In the COVID-19 downturn, occupancy remained above 93% nationally, and rents rebounded within a year. Few asset classes can match this consistency across market cycles.

Inflation Protection in Real Time

A key reason for multifamily’s resilience is its lease structure. Unlike commercial leases, which may not reset for 5–10 years, apartment leases typically reset every 12 months—sometimes even sooner. That gives landlords the ability to adjust pricing in near real time as inflation rises.

You can see this in the data. In 2021, when U.S. CPI inflation hit 7%, the highest level in 40 years, multifamily rents increased by 13.5% nationally, according to Zillow. In top markets like Phoenix, Tampa, and Austin, annual rent growth exceeded 20%. This dynamic may provide a more immediate inflation response than other asset types, though outcomes will vary by market and cycle. Try getting that kind of inflation correlation out of long-dated bonds or private equity funds locked up for 10 years.

Leverage That’s Actually Sustainable

Another differentiator is multifamily’s ability to absorb leverage. Stabilized apartments generate consistent income, allowing for modest, responsible leverage—typically around 60–65% loan-tovalue. That’s enough to enhance returns without exposing investors to margin calls or interest rate shocks.

Unlike other asset classes that rely on aggressive debt structures—think private equity buyouts at 8–10x EBITDA—multifamily’s leverage is supported by real cash flow. That’s why the delinquency rate on multifamily CMBS loans has historically remained under 1.5%, even during downturns, compared to 7–8% for hotel or office loans during COVID-19. With fixed-rate, amortizing debt and interest rate caps, these portfolios are built to weather storms. And unlike bonds, whose values plummet when rates rise, multifamily often sees improved net operating income due to rising rents, partially offsetting rate pressure.

Long-Term Demographic Tailwinds

Let’s zoom out even further. Multifamily benefits from powerful, long-term demographic trends. Millennials and Gen Z are driving demand: Combined, these cohorts represent over 170 million Americans, and they’re renting longer than previous generations.

Home affordability is at a 40-year low: According to Redfin, less than 15% of homes on the market in 2023 were considered affordable for the typical U.S. household. The U.S. housing shortage is severe: Freddie Mac estimates a structural shortfall of 3.8 million homes, with new construction failing to close the gap.

All of this drives sustained, inelastic demand for rental housing. The capital markets may ebb and flow, but people will always need a place to live.

A Smarter Allocation Strategy

To illustrate how multifamily fits into a modern asset allocation framework, consider two investors:

• Investor A allocates 15% of their $10 million portfolio to venture capital and crypto. They experience illiquidity, high volatility, and unclear valuation paths.

• Investor B allocates the same 15% to a diversified pool of low-leveraged, cash-flowing multifamily assets. They receive consistent distributions, NAV stability, and inflation-linked growth.

• Investor A is exposed to risk narratives. Investor B owns real assets with real income.

• One’s hoping for alpha. The other’s already collecting it.

This isn’t about dismissing innovation. It’s about clarity. If your goal is income, capital preservation, and resilience, multifamily real estate stands out as one of the few “alternatives” that arguably belongs at the center of your portfolio.

Multifamily is a Core Holding, Not an Alternative

It’s time to stop lumping everything outside of stocks and bonds into one “alternative” bucket. That label might have served a purpose 30 years ago, but today it’s an anachronism—a lazy construct that muddies portfolio thinking.

Multifamily isn’t an alternative. It’s a proven, essential, resilient asset class that merits real consideration as a core holding. It throws off cash. It protects against inflation. It’s backed by structural demographic forces and behaves well under modest leverage.

In a world addicted to volatility and chasing the next shiny thing, multifamily offers something refreshingly rare: clarity, consistency, and common sense.

Let the others chase unicorns. I’ll take 300 units in Houston.

Disclaimer: This article is for informational and educational purposes only and should not be construed as investment advice or solicitation to buy or sell any securities. All investments carry risk, including the 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 herein are those of the author and do not necessarily reflect the views of any firm or affiliate.

Ethan Penner
Chairman
Hill Street Realty

Hill Street Realty is a vertically integrated real estate investment firm with a 24-year exclusive focus on value-add multifamily assets in high-growth U.S. markets. Our principals bring over 40 years of direct leadership experience, supported by a team with a combined 90 years in real estate investment, operations, and asset management. By managing the entire investment lifecycle in-house, we enhance execution precision, reduce operational friction, and create durable value for our investors.