2024 Multi-family Trends
Challenges
Multifamily is facing headwinds due to record new supply, with 900K units under construction and over 440K set to be delivered this year, per CBRE’s 2024 outlook. Performance varied by region and by asset class, but generally fast-growing sunbelt & mountain west markets are experiencing record new supply and a drop in asking rents, while the slower moving secondary or tertiary markets are generally expected to be the better performing markets.
|
Metropolitan Area Top 10 |
2024 Annualized Growth in Gross Income |
2024 Vacancy Rate |
Metropolitan Area Bottom 10 |
2024 Annualized Growth in Gross Income |
2024 Vacancy Rate |
| Oklahoma City | 3.6% | 5.9% | San Antonio | 1.4% | 7.8% |
| Albuquerque | 3.5% | 2.8% | Seattle | 1.3% | 7.3% |
| Tulsa | 3.5% | 4.7% | New York, Outer | 1.1% | 7.0% |
| West Palm Beach | 3.5% | 5.5% | Philadelphia | 1.1% | 5.9% |
| San Francisco | 3.4% | 4.2% | Fairfield County, CT | 0.9% | 7.0% |
| Riverside | 3.3% | 3.7% | Colorado Springs | 0.9% | 6.9% |
| Syracuse | 3.3% | 2.6% | Minneapolis | 0.6% | 7.8% |
| Little Rock | 3.2% | 4.4% | Washington, D.C. Core | 0.5% | 8.9% |
| Norfolk | 3.2% | 3.6% | Austin | 0.3% | 9.3% |
| New Orleans | 3.2% | 5.1% | Nashville | -0.1% | 9.3% |
| United States | 2.1% | 5.7% | |||
Source: Freddie Mac
Further, operational expenses such as payroll, insurance and real estate taxes have been up significantly reducing property’s Net Operating Income. To combat inflation, the federal reserve started raising benchmark borrowing rate starting in April 2022. After raising interest rates by a whopping 525 points, the federal funds rate currently stands at 5.25% to 5.5%, a level not seen since July 2007. Higher interest rates significantly reduce property cash flows, require higher equity to get financing & can cause property value to go down if rates stay high for longer.
Looking ahead
Economic data shows we have made significant progress towards bringing inflation down from the June 2022 high of 9.1% to the annual rate of 3.4% in December 2023. Despite aggressive rate hikes, the January 2024 jobs report was better than expected and unemployment held at a low rate of 3.7%. In July 2023 the Fed put a pause on its rate hiking campaign. But before bringing the rate down, they are looking for more data showing inflation is continuing to come down to their long-term target of 2%. At the January 31st meeting, the Fed indicated that it is done raising interest rates but made it clear that a March rate cut is unlikely. With the possibility of rate cuts towards the end of the year, it could bring buyers back into the market and spur multifamily lending volume for the year.
According to Freddie Mac’s 2024 Multifamily outlook, despite the short-term supply headwind, over the longer-term the multifamily market will continue to be supported by the overall shortage of housing, an expensive for-sale housing market, and the next generation of renters entering prime renter age. Per CBRE’s 2024 outlook, Multifamily real estate is playing a more important role in alleviating a severe shortage (at least 3.1 million) of single-family homes that is contributing to homeownership challenges, particularly in a high-interest-rate environment. The premium for an average monthly mortgage payment of a newly purchased home vs. average monthly rent is expected to remain above 35% in 2024 versus 52% in 2023.
The opportunity
Investors hoping for major distress like 2008-2012 may be in for a big disappointment. Despite all the challenges, the fundamentals for multifamily are healthy, demand for multifamily is still strong, there is no banking crisis & there is plenty of dry powder waiting on the sidelines simply waiting for the right deal. If distress does hit the market, it will be short-lived & institutional capital will return resulting in a competitive environment. Owners who purchased multifamily properties in 2021 & 2022 on floating rates with overly optimistic rent growth assumptions and did not execute their business plan are the primary candidates who may be facing cash flow challenges & be in a difficult position to sell. However, if the interest rates drop significantly in the next 6-12 months, some may be able to refinance and defer the sale until the market recovers.
The overwhelming majority of new supply of apartments is Class A construction, however work force housing class C and renter by necessity class B properties, may not see significant reduction in demand. The window of distress opportunity will be short, we can’t time the market, however the next 12 months are likely to present a good buying opportunity. There is a lot less competition today and if we buy in an area with good fundamentals and demand, we will do well as long as property cash flows. We simply wait for an opportunistic time to refinance at a lower rate & sell when cap rates compress thereby increasing the value of property.
Sincerely,
Sanjeev
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