What's Next For Multifamily Real Estate?
So far, in 2024, a confluence of factors has challenged the multifamily real estate market. A new analysis from Freddie Mac indicates that next year could see better days for the multifamily market. Freddie Mac, formally known as the Federal Home Loan Mortgage Corporation, is a government-sponsored enterprise that helps provide a secondary market for mortgages in the U.S. It buys mortgages from lenders, pools them, and sells them as mortgage-backed securities to investors. It issues regular reports on the lending environment and the overall status of the housing market.
The multifamily market differs from the general residential market because it takes much longer to complete new projects. Multifamily permits and starts hit a rate in 2022 that hadn't been seen since 1985. Now that supply is hitting the market. During the first quarter of 2024, supply hit a level that hadn't been seen since 1980.
Timing supply and demand can be tricky. Many real estate markets are seeing a high level of new properties ready for lease-up, which tends to drag rents down. Freddie Mac reports that rent growth over the past year has been slow, and vacancy rates are rising. The market will take some time to absorb this current supply state. In 2024, multifamily starts have been lower than usual. That means that over the next couple of years, we will see a decrease in the number of new buildings ready for rent across many markets. Based on this report, we can identify opportunities for future investors in the multifamily space.
Look Beyond The Usual Locations
The report shows that while metro-level performance varies, the markets that have yet to be overbuilt will have the greatest opportunity for rental growth. Less expensive secondary and tertiary markets with lower supply levels represent an opportunity. Investing in these less in-demand areas, especially in the Northeast and Midwest, could yield better returns due to less competition and more stable occupancy rates.
Some markets that saw booming rent growth in 2021 and 2022 now have high supply, such as Austin, Texas, where prices dropped by 14%, according to Zumper data. These once-booming markets are expected to be among the weakest performers. In addition to Austin, the report identified Salt Lake City, Nashville, and Charlotte as markets with the highest supply ratio. Where inventory is up, rent is likely to stagnate.
Waiting For The Interest Rate Moment
When interest rates moderate, multifamily investors may have a window of opportunity to purchase properties at an advantageous price with reasonable loan terms. With interest rates expected to stabilize and decrease, the cost of financing may become more favorable. Investors should be prepared to act when borrowing costs decrease. Property prices have declined nearly 19% since the second quarter of 2022.
As capitalization rates have increased, there may be a chance to find properties with favorable cap rate spreads, especially if interest rates begin to decline as projected. Freddie Mac expects the multifamily transaction rate to be relatively soft as long as interest rates remain high. The report also identified the maturity risk issue, with around $500 million of multifamily loans coming due over the next two years. Many of these loans may not be able to be refinanced at current rates. This is similar to Grant Cardone’s prediction that more properties will flood the market as loans come due. This is either good or bad news, depending on which side of the transaction you sit on.
The other factor regarding interest rates is whether a downshift in the cost of a mortgage will uncork the stagnant home sales market. In the past four years, the cost of buying a home has soared due to higher home prices and escalating mortgage rates. If homes become more affordable in many markets, that could mean that people will leave rental housing and opt for homeownership. However, the transition will likely take some time to occur.
If our economy experiences a soft landing, the report forecasts slow and steady growth in multifamily demand as the market works through the new supply of units. Freddie Mac forecasts 2.7% rent growth nationwide for the year. Should the economy suddenly weaken with higher unemployment and a potential recession, rent growth and vacancy rates would be pressured. Monitor national economic indicators and local development, as these can impact market conditions and investment performance.
There Are Better High-Yield Opportunities
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