Multifamily’s Dry Powder Is At A Record High

Article originally posted on Globe St. on May 24, 2022

Opportunistic and value-add strategies continue to be the focus for funds targeting multifamily investment.

If you thought the first quarter’s $63 billion in multifamily sales was a lot, consider the dry powder that is still waiting on the sidelines for this asset class. According to Newmark, it is a record $250 billion.

That equates to over $714 billion in purchasing power at a 65% LTV.

Opportunistic and value-add strategies continue to be the focus for funds targeting multifamily investment, accounting for 88.0% of all fund targets.

Interest Rates Could Cause a Slowdown

However, it is looking less likely that the market will see a similar rush to acquire assets in the following months as interest rates continue to rise. Already some investors that bought properties in Q1 are finding their profit margins squeezed as their initial return rates have fallen a percentage point or more below their mortgage’s interest rate, according to the Wall Street Journal.

Michael Vassilaros, chief investment officer of Key International, tells that the increase in interest rates will likely cause a slowdown in residential transaction volume and may eventually impact cap rates and pricing marginally, “but the fundamentals remain incredibly strong based on the data we are seeing.

“Florida is expected to maintain sustained rent growth throughout, with areas such as Tampa and St. Petersburg forecasted to be among the top growing markets in the nation.

“We believe multifamily development will continue to benefit from these trends, especially in well-located communities.”

Returns, Absorption, New Development Impressive

Appreciation returns accounted for 19.8% over the trailing 12 months, well above the 10-year annualized average of 4.6%, so Newmark suggested there could be a return to the mean is possible.

Additionally, effective rent growth grew in 129 out of the top 150 markets, outpaced inflation and no markets experienced rental decline, year over year. Five of the top rent growth markets were in Florida.

Nationwide, 95,000 apartment homes were absorbed as new supply totaled 78,000. An additional 336,000 units are projected to be delivered through 2022 – a record level for the full year.