January Multifamily Market Update

Get More CRE
Investing Insights
Right to Your
Inbox

Year-end Review and Outlook

Apartment supply jumped to a 36-year high in 2023, with 439,000 units completed. Most of these projects started several years ago when interest rates were near zero and occupancy and rent growth were close to all time highs.

Builders and owners have to contend with a very different operating climate today. High supply means renters suddenly have far more options than they’ve had in recent years, putting downward pressure on rent growth.

Notably, though, rent growth levels are no longer rapidly decelerating. Year-over-year rent growth peaked at 15.7% in March 2022, and fell from there until hitting 0.3% in August 2023. It’s held around that mark for five straight months. Even in most markets cutting rents, the pace of rent cuts hasn’t further deepened.

Another 671,000 units are scheduled to complete in 2024, adding another challenge for apartment investors also confronting higher expenses and elevated debt costs.

1

However, the deceleration of rent growth is not a function of demand. Nationally, we posted the third strongest 4Q on record, as the U.S. multifamily market absorbed close to 60,000 units. While not an eye popping figure, like 2Q23’s print of 130,000 units, when paired with 3Q’s negative print of 60,000 units that’s around 120,000 swing in units rented over the last six months.

Demand should remain strong in 2024. Wage growth continues to outpace rent growth, allowing renters to upgrade and afford units, and homes prices are still inflated in most of the country, making home ownership more difficult to achieve.

2

Lending

Bank lending to multifamily properties remains challenged, with 65% of banks tightening lending standards for loans secured by multifamily properties in 4Q 2023.

Small banks account for 70% of all CRE loans in this country, and many have paused commercial lending to work out challenges with their existing portfolio of loans. Banks are trying to avoid selling their worst properties because that’s going to force them to take a larger write-off, and because every property that’s sold becomes a comparable sale for the appraisers that value the next property, decreasing the value of their existing loan portfolio.

Knowing banks are hesitant to foreclose and sell troubled assets is a benefit to investors. Banks have been willing to work with borrowers to extend loans, rewrite contracts, and move the problem down the road to be solved in a more suitable interest rate environment.

3

Interest Rate Cuts

Of the $1.2T in commercial loans maturing over the next two years, around $350 billion is secured by multifamily property (below). These maturities pose a large risk to the global economy as a whole, as pensions, governments, endowments, and institutional investors the world over are invested in the CLO’s these real estate loans are packaged into and sold for yield hungry investors.

4

Both market participants and the Fed realize the implications of allowing these loans to default, and are behaving accordingly.

The Fed, in an effort to control future inflation, is signalling three rate cuts and releasing conservative messaging on the timing and amount of those cuts. The market, understanding the predicament the commercial real estate market has placed the Fed in, is betting there will be more cuts this year than the Fed can publicly acknowledge.

Cap Rate Compression is Eminent

Remember Warren Buffet’s advice: Be fearful when others are greedy and greedy when others are fearful.

The problems facing commercial real estate have caused cap rates (an assets unlevered return, and an expression of the assets relative risk) to widen dramatically over the last two years.

Think of cap rates like bond yields. When bond yields move up, the price of those bonds move down, and vice versa. The same is true in real estate. As cap rates move up, the price of the underlying property moves down. Pictured below are the shifts in cap rates by real estate asset class over the last two years. Multifamily cap rates increased by 58%, middle of the pack compared to other asset classes, with Office experiencing the largest rise in cap rates (i.e. the largest decline in value) at 114%.

5

Here’s why this matters. We experienced the fastest rate-hiking cycle in history over the last two years. As we move into more accommodative fiscal policy and interest rates begin to move down, cap rates will correspondingly compress. Remember, declining cap rates mean higher property values.

The time to invest in real estate is right now, before the rate hikes occur, before all the news is priced in, before the institutional players snap up everything resembling a good deal, which is already happening. Over the weekend Blackstone acquired Tricon Homes, one of the largest single-family rental owners in the country for $3.8B.

Remember, be greedy when others are fearful.

For additional in-depth perspectives on crucial concepts and trends in multifamily investment, click here to join the MarketSpace Capital Report.

Have friends or colleagues who would appreciate this newsletter? Simply copy and share this link to help them sign up.

Curious to chat with our investment team? Schedule a brief meeting by clicking here.

 

Disclaimer:

The information presented in this report, blog, or article is intended for informational purposes only and should not be interpreted as an invitation or solicitation to buy or sell securities or to engage in any investment or decision-making process. This communication serves as educational content and not as financial advice.

Get More CRE
Investing Insights
Right to Your
Inbox

About Us

MarketSpace Capital, LLC is a Houston, Texas-based private equity real estate development firm focused on ground up developments and value-add investments throughout the United States.

Contact Us

Find Us

Headquarters

9100 Southwest Freeway, Suite 201 Houston, Texas 77074

Disclaimer: The information presented in this report, blog, or article is intended for informational purposes only and should not be interpreted as an invitation or solicitation to buy or sell securities or to engage in any investment or decision-making process. This communication serves as educational content and not as financial advice.