CRE Daily’s Post

Multifamily cap rates are nearing pre-pandemic levels, driving renewed investor interest as transaction activity picks up. Despite the rebound, valuations remain in flux, creating opportunities for savvy investors to acquire properties before appraisals catch up. Strong rental demand, especially in job-rich regions, is fueling optimism for moderate price growth. Q2 saw a $16B boost in sales, marking the first increase in two years. Read the full analysis on the evolving multifamily landscape and what it means for investors: https://lnkd.in/gviUjKJ4

Multifamily capitalization (cap) rate changes are statistically tied to interest rate changes. But to what extent? Here’s a look at what the data says.

Multifamily investors are getting frisky again, with rates ticking down and rents firming up. Are we back? Here are my 5 reasons why we might be: https://lnkd.in/e-dnfkp4

New multifamily supply hit another record in Q1. However, much of this supply delivery is concentrated to a handful of metro markets. Twelve months from now, the headlines will likely read that new multifamily deliveries are near record lows again.

Prime Multifamily Metrics Continue to Increase in Q4 Despite the Federal Reserve holding interest rates steady since July, unlevered internal rate of return (IRR) targets, going-in cap rates and exit cap rates for prime multifamily assets increased slightly in Q4. Across-the-board decreases are expected once the Fed begins cutting interest rates, likely by midyear. https://lnkd.in/gMb4ENNw

Momentum in the multifamily market is trending up and is likely to continue thanks to lower debt costs and higher cap rates. Many buyers have been on the sidelines waiting out financing hurdles and softer fundamentals, and positive trends should start to loosen that backlog, said Marcus & Millichap in its third-quarter multifamily national report.

The multifamily fall from grace over the last couple of years was unexpected by most at the market’s pandemic highs. The interest rate increase has hit hard, as have some other factors. However according to Ralph Rosenberg, partner and global head of real estate at global investment firm KKR, problematic conditions should start tapering off after 2025, leaving strong possibilities for rent growth and opportunities to “buy high-quality properties below replacement cost while achieving attractive long-term yields.” The factors confounding multifamily certainly start with interest rates. “Debt levels relative to equity are higher in multifamily than in some other segments, a loan maturity wall looms, and interest rate caps are expiring, putting many owners in the position of refinancing at a time when their properties are worth less than their acquisition basis and interest rates are much higher,” Rosenberg wrote. He notes that multifamily is one of the most leveraged of CRE investments. That makes refinancing challenging. There is a loan maturity wall, reduced availability of financing, and high debt loads. That’s only one part. As GlobeSt.com has previously reported, 2023 saw a record number of apartment unit deliveries added to inventory and 2024 is expected to top that by half again. These aren’t evenly distributed across the country, but the concentration in places even with high increases in population is still enough to depress prices, occupancy rates, and rent growth. In addition, operational costs have increased. “Floating-rate interest payments rose faster than income from rent and fees,” the firm said. Falling valuations aided in negatively affecting debt service coverage ratios, making many properties fiscally unsustainable to the lender. Also, utilities and property taxes have continued to climb, adding to multifamily difficulties. “Over $250 billion in multifamily loan debt matures in 2024 alone, and some owners will face a gap upon refinancing,” they wrote. “Likewise, as interest rate caps typically last for three years, many owners are looking at a sharp increase in the cost of debt.” KKR expects a tough couple of years in a deleveraging cycle. Owners and investors who can hold on during this period face different conditions. There is the chance of lower interest rates, although the degree and pace of any reductions are up in the air now. Demand for units will grow as the rising expenses and difficulty of continuation of the building make it virtually impossible to keep pace with additional units. Supply growth forecasts for many metropolitan areas are below the 2018-to-2022 five-year average, which wasn’t adequate to satisfy market needs.

Prime Multifamily Metrics Continue to Increase in Q4 Despite the Federal Reserve holding interest rates steady since July, unlevered internal rate of return (IRR) targets, going-in cap rates and exit cap rates for prime multifamily assets increased slightly in Q4. Across-the-board decreases are expected once the Fed begins cutting interest rates, likely by midyear. https://lnkd.in/gNBcSWca

Prime Multifamily Metrics Continue to Increase in Q4 Despite the Federal Reserve holding interest rates steady since July, unlevered internal rate of return (IRR) targets, going-in cap rates and exit cap rates for prime multifamily assets increased slightly in Q4. Across-the-board decreases are expected once the Fed begins cutting interest rates, likely by midyear. https://lnkd.in/gm9j-nEQ

Prime Multifamily Metrics Continue to Increase in Q4 Despite the Federal Reserve holding interest rates steady since July, unlevered internal rate of return (IRR) targets, going-in cap rates and exit cap rates for prime multifamily assets increased slightly in Q4. Across-the-board decreases are expected once the Fed begins cutting interest rates, likely by midyear. https://lnkd.in/g2fHPp4n