This is the next big property investment

Rent hikes are dogging tenants, but big money investors say the season of love for residential, multi-family rental properties is only getting started.

“Property is in a sweet spot, slow (economic) growth is good for us,” Barry Sternlicht, chairman and chief executive of Starwood Capital, told CNBC in an exclusive interview. “It doesn’t induce new supply and rents are going up, particularly in the U.S.”

Starwood Capital’s lyrics match its tune, with the company making big bets on multi-family properties — or properties designed to house multiple families in separate units, such as apartment buildings, duplexes and townhomes. In late October, Starwood teamed up with the Milestone Apartments REIT to buy the Landmark Apartment Trust in an all-cash $1.9 billion deal, giving the partners control of 78 apartment developments in eight U.S. states. Starwood will take 63 of the developments and Milestone the remaining 15.

That deal was followed in quick step by Starwood’s $5.37 billion purchase of more than 23,000 units across five states from Equity Residential.

Starwood Capital isn’t alone. Blackstone Group last month partnered with Canadian real estate investor Ivanhoe Cambridge to buy Manhattan’s biggest apartment complex, Stuyvesant Town-Peter Cooper Village, for $5.3 billion. That followed Blackstone’s September purchase of 24 buildings in Manhattan.

Property looks good compared with the alternatives, Sternlicht said.

“The hedge funds have not done very well, the equity markets are flat (and) the debt-to-GDP (gross domestic product) of the world is climbing,” he said. “Property is a great spot to invest today because we can get close to double-digit cash yields out of the box, leverage is available, it’s plentiful, it’s at reasonable cost and there’s not a lot of new supply.”

But it’s about location, location, location, he noted.

Starwood’s $7 billion apartment bet is on markets with young populations and good job growth, including south Florida, Denver, Seattle and Washington, D.C.

“People are getting married later and the demographics of the country are the 18-year-old boom of the millennials looks like we have five, six, (or) seven years of pretty steady population growth in that sector, which is the sector that tends to rent,” he noted. “They stay single and in apartments longer.”

What’s good for landlords and investment returns hasn’t been all that great for tenants, who have been facing a wave of rent rises in the U.S.

Property managers in the U.S. may raise rents by as much as 8 percent next year as demand rises and vacancies fall, after about 88 percent said they raised their rent over the previous 12 months, according to a survey released in October by property rental website Rent.com.

Vacancy rates for rental housing nationally dropped to a 20-year low of 6.8 percent in the second quarter, down from 7.5 percent in the year-earlier period, census data show.

The number of households severely burdened by rent – or those spending more than 50 percent of their income on rent – is set to rise by at least 11 percent from an estimated record 11.8 million this year to 13.1 million by 2025, research from Harvard University’s Joint Center for Housing Studies (JCHS) and Enterprise Community Partners estimated.