Seeing Clarity in The Eye of The Storm and Moving Forward – 2023 Multi-Family Market Forecast

After a record-breaking year for sales velocity and rent growth across all product types in 2021, everyone thought we were in store for another record-setting year in 2022. It looks as if we were all wrong! As the Feds started to tame inflation with the first of their many interest rate hikes, we saw interest rates climb to the highest they have been since 2008. The days of sub-4 % interest rates and affordable labor and construction are no more. Instead, the economy and investors have been met with a storm of high-interest rates, banks not lending, labor shortage, inflation across all product types, and the fear of an impending recession. This has led to a worry of potential doom in commercial real estate.  

However, in contrast to the office and traditional commercial retail products, multi-family could be argued as the one product type that can make it through these hard times. This is because of the historically strong fundamentals in owning and investing in apartment rentals.

This leads one to ask, can strong deal fundamentals lead us to see clarity in the eye of the storm?

In short, yes. Individuals who own multi-family properties are in essence riding out this perfect storm of inflation and interest rate hikes. As rates have gone higher and higher droves of potential home buyers in the market have been priced out,  demand for apartments stayed strong, even increasing in some markets.

With the inherent benefits of being able to continue to increase rents, have yearly turnover, etc. Most multi-family assets have maintained most of their value in this correcting market. This in turn makes it extremely hard to transact with interest rates having doubled. The adage that multi-family has always been the golden child of real estate is true, in this case, its biggest strength – Resiliency – is also its weakness.

Because of the resiliency that multi-family properties hold, owners are in turn choosing not to transact as much as they were in much more favorable debt markets. Their incomes are still strong and in theory, the values are still there. The big elephant in the room is obtaining debt that is favorable for a purchase. For several years, buyers had it good – they could get super cheap debt at high loan-to-values. Since this is all gone, buyers are now having to adjust how they underwrite and purchase. This has led to a massive slowdown in multi-family investment sales.

All we can say is to be patient. If a deal has strong fundamentals, figure out a way to make it work. Put down 30%, raise another $100k of equity, and ask for seller financing with a more favorable debt term to pay the higher purchase price. And lastly, keep your ears to the ground. The current market conditions are not permanent.

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