Fundamentals Favor Multifamily

Article originally posted on HERE on September 6, 2023

Depending on who you talk to (or where you get your information), multifamily is either a strong sector that’s going gangbusters or a sector that maturing loans could negatively impact. The Q2 2023 numbers also tell an interesting story of investment volume decline and an uptick in vacancy.  Rent-growth numbers are also all over the place. Apartment List’s September 2023 Rent Report indicated negative annual and monthly rent growth. Meanwhile, Yardi Matrix’s July 2023 numbers stated a 1.6% year-over-year rent growth.

Yet in its Summer 2023 U.S. Family Outlook, Yardi Matrix extolled multifamily’s strong performance through the middle of the year while acknowledging that “the market faces challenges related to the potential economic downturn and rising interest rates . . .” The Yard Matrix analysts noted that these factors continue eroding property values while potentially increasing distress.

The reports and news are generating whiplash among those in the industry. But anticipated household formation, combined with ongoing struggles in the single-family housing sector, support the idea that longer-term rental demand “will ultimately help multifamily assets preserve more of their value, even as we enter more challenging economic times,” said Sam Tenenbaum, Cushman & Wakefield’s Head of Multifamily Insights in a recently released video.

The Situation with Single Family

Anyone remotely familiar with single-family housing knows that mortgage rates have increased quickly due to the Federal Reserve’s continued hike of the Effective Federal Funds Rate. “My number for you this week is 7.09%,” Tenenbaum observed. “That’s the Freddie Mac reported average fixed 30-year mortgage rate.” That number is the highest since April 2002, Tenenbaum added.

The other number he mentioned was $389. “That’s the difference between the principal and interest payment on a mortgage for a medium-priced home and the average rent,” Tenenbaum explained. So these days, he pointed out, it’s cheaper to rent than to buy. This “won’t necessarily encourage owners to sell their homes and become renters,” he added. “It does create a sizeable incentive for new households to consider renting rather than buying.”

While home mortgage interest rates are increasing, so are home prices. Meanwhile, inventory is slowing. A recent article in The Economist noted that homebuyers face limited inventory, saying, “Although demand for homes has fallen as rates have risen, the supply of properties has fallen almost in lockstep.”

According to the National Association of Realtors (NAR), existing home sales in July fell 2.2% from the month before. On a year-over-year basis, the drop was more pronounced at 16%. “Two factors are driving current sales activity – inventory availability and mortgage rates,” said NAR Chief Economist Lawrence Yun in a press release. “Unfortunately, both have been unfavorable to buyers.”

Rentals on the Rise?

Current multifamily numbers indicate lower rent growth, somewhat middling absorption and higher vacancy rates. Some of this could be attributed to new units coming online. IPA reported that construction on 950,000 units was underway at the beginning of Q2 2023, and “roughly 400,000 rentals are expected to finalize throughout this year,” representing “the largest delivery volume on record.” Based on Yardi Matrix research, RentCafe added its numbers (aggregated at the MSA level), reporting that “another 1 million new rentals are set to be completed through 2025, despite headwinds.”

The “O” specter – “overbuilding” hasn’t been raised yet. Many analysts are predicting bright things for multifamily. Analysts with Marcus & Millichap’s Institutional Property Advisors believe that ongoing homeownership challenges will lead to longer-term renters, especially among the late-20 to early-30-year-old cohort. CBRE researchers agreed that a shortage of for-sale home inventory and increased mortgage rates “may bode well for multifamily properties, which likely will see fewer residents moving out to purchase their own home.”