Buyer and Seller Gap Continues 

There continues to be a gap between what sellers want for their property and what buyers want to pay. The interest rate environment is playing a large role in this gap, as buyer returns are lowered with higher interest rates. We’ve looked at several hundred deals already this year, and only about three or four have passed our return requirements. 

Federal Reserve Updates

Over the past few months, the Federal Reserve has gone in opposite directions from meeting to meeting, so who knows what they will do when they have their next meeting on March 20, 2024. In December 2023, they indicated they would make three rate cuts in 2024, and the market reacted well, with the U.S. treasury rates dropping to their lowest level in about six months. Based on those December comments, investors started to speculate the Fed might cut rates as soon as March. Then, in January, Federal Reserve Chair Jerome Powell reacted to investor speculation about a potential rate cut in March by saying, “Based on the meeting today, I would tell you that I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting to identify March is the time to do that, but that’s to be seen.”

Multifamily Takeaways

Here are some general takeaways from Newmark (a national real estate brokerage group) that we follow and read in the multifamily real estate space. They put out general market information quarterly.

The spread between homeownership and rental costs grew to $1,066 in the fourth quarter of 2023. This is a 5.9% increase from the third quarter of 2023. Driven by an increase in home prices and record-level interest rates, renting continues to be significantly more economical than owning a home.

Following a below-average year for demand in 2022, apartment demand was robust in 2023. Fifty-eight thousand two hundred units were absorbed in the fourth quarter of 2023, totaling 233,741 units for the entire year. On a nominal basis, markets throughout the South dominated the top markets for absorption, led by Houston, Phoenix, and Austin.

Despite nearly 440,000 units delivered in 2023, new supply is anticipated to surge 53% year over year in 2024; however, the high cost of capital and limited financing available for new construction will keep new supply in check in the coming years, with a 42% deceleration in new supply projected in 2025.

Quarterly rents declined 1.3% in the fourth quarter of 2023, while year-over-year growth increased 0.2%. Annualized rent growth has declined for seven consecutive quarters.

Multifamily expenses increased 7.7% year-over-year, led by a 33.5% surge in insurance costs, putting added pressure on operations. Insurance has increased for four consecutive quarters.

Price dislocation and an elevated interest rate environment continue to hinder the investment sales market, as evidenced by the 50.0% year-over-year decline to $26.9 billion in quarterly sales volume and a 61.1% decrease annually. Multifamily remains the largest share of investment sales of all U.S. commercial real estate property types, at 31.8% in 2023. There is growing optimism that rate cuts will spur activity in the second half of the year.

Despite the rate roller coaster, multifamily continues to perform positively with a strong fundamental outlook. It will take the right seller and right buyer to get deals done in this environment. I think it’s still a good time to buy the right deal if it passes all of our underwriting and due diligence criteria. That said, all eyes will be on the Federal Reserve and what results (if anything) from their March 20th meeting.