Multifamily Industry Brief
Second Quarter 2024
Sticky inflation has cooled expectations that the Fed will start an aggressive rate-cut campaign any time soon and it remains to be seen how much the Fed trims its Federal Funds Rate from the current 5.25% to 5.5% range. Doubts have even risen that they will cut at all, and if so, just a little this year. In other words, capital for multifamily housing investing should be constrained for the balance of the year, however that doesn’t mean spigots will be closed. After all, housing is historically one of the safest places to park capital, given the essential nature of the asset class.
As we are reporting in the Capital Markets Industry Brief, spring edition, major institutional investors are doing much more than tiptoeing back to the CRE investment market – they are making significant, and early-stage moves in this recovery cycle to buy real estate, including multifamily housing.
Los Angeles-based multifamily investment firm TruAmerica Multifamily, for example, recently paid nearly $50 million in an off-market deal for a 252-unit apartment community in Ashville, NC, after staying on the sidelines during 2023. TruAmerica typically buys value-add, Class B workforce housing in suburban submarkets. Matt Ferrari, the company’s co-Chief Investment Officer and head of acquisitions told one media outlet: “We are starting to find deals again where there is a risk-premium relative to vintage. Now we are back to an environment where if a property is older, the Cap Rate tends to be higher.” He added that everything TruAmerica has purchased in recent years was all built in the mid-1990s or early 2000s, whereas a large portion of its portfolio is older.
Market Fundamentals: Property data-company Yardi Metrics reported in April that multifamily renewal rents had risen 4.6% year-over-year, and that rents for apartment dwellers are still rising. Attribute that to housing inflation, or what the government calls Shelter Inflation for homes and apartments, which rose 5.7% in March.
Meanwhile, Redfin reported the median asking rent for apartments across the U.S. increased 3.3% in March yet still below the record high achieved in August last year at $2,054. The median price equates to half of the market below that number and half of the number above it.
The top end of the rental housing market isn’t fairing as well for investors and landlords, but it’s good news for occupiers. All new apartment communities, by nature of their recent development, qualify as Class A, luxury or some equivalent of the upper end, and rent growth in that sector has been the weakest in recent memory. Blame it on an abundance of supply. CoStar reported that rent growth the past two years for the overall apartment market fell from 10.3% to 0.8%, yet the data company’s four-star and five-star product plunged from 11.8% to -0.3% by the first quarter this year.
In one article, CoStar stated that “stabilization of the top-end of the multifamily market is not expected until 2025, with little change anticipated in completion rates compared with record highs in previous years.”
As we stated in our previous report, last year developers went to ‘pencils down’ for new projects, so the current new supply as well as new inventory expected in 2025 are projects that commenced three or four plus years ago. As such, one suspects that the multifamily market could reach equilibrium in 2026 and then tip downward into a market favoring landlords again, when supply shrinks.
Rents may, however, stay relatively high due to inflation.
An economist at Moody’s Analytics said that housing inflation typically runs higher than general inflation. With the surge in new supply in many markets, particularly the Sun Belt and other places with rising vacancy rates, the spring and summer lease renewal and relocation seasons could cool the rate of rental increases, so goes that thinking. As usual, that will vary by market, location and other supply in each market.