Signals Emerge It's Prime Time to Invest in Multifamily

With strong fundamentals, new construction starts, and a sizable amount of capital on the sidelines, the multifamily sector is attracting the attention of eager investors.

'Enormous' Amount of Capital on Sidelines Means Now Is Time to Buy Multifamily

With strong fundamentals, new construction starts, and a sizable amount of capital on the sidelines, the multifamily sector is attracting the attention of eager investors, saying now is the time to start deploying capital.

Market dynamics: According to John Sebree, the senior vice president and national director of the Multi Housing Division at Marcus & Millichap, the market is seeing an occupancy surge, consistent rent growth, and a housing shortage. Over the recent years, there's been an influx of new market deliveries, although multifamily starts have decreased by more than 50% from Q4 2022 to Q3 2023. This has led to a minor spike in vacancy rates, but as new units get absorbed, an imminent scarcity will likely drive rents higher.

Capital on deck: Sebree emphasized the vast capital awaiting an opportune moment to re-enter the market. Quoting Lloyd Blankfein, he stressed that investors shouldn't wait for a market bottom signal but act proactively. With limited deals, he anticipates intensified competition as sidelined capital re-engages. For eager investors, Sebree advised determining their expected cap rates, hinting they'd likely be between 5.5 and 6 in the current market.

Shifting investor interest: Global investors are also considering a shift from the US office sector to residential properties. The American Federation of International Real Estate (AFIRE) predicts investors will increasingly focus on multifamily due to changing market dynamics and the allure of stable returns. This shift reflects growing optimism in the multifamily market and its potential for long-term growth.

➥ THE TAKEAWAY

New investment horizons: With high occupancy rates, robust rent growth, and the housing shortage, multifamily properties continue to provide stable returns. While challenges such as high interest rates and constrained debt markets persist, the significant amount of capital waiting on the sidelines offers an opening for eager investors to enter the market. As regional market preferences shift towards suburban areas, multifamily assets in these locations may present lucrative investment opportunities for those seeking long-term growth.

Source: Signals Emerge It’s Prime Time to Invest in Multifamily

https://www.creconsult.net/market-trends/signals-emerge-its-prime-time-to-invest-in-multifamily/

Grand Prairie 2nd

NEW LISTING: 4,408 SF Medical-Dental | Dallas-Fort Worth Market
eXp Commercial is pleased to present to the market a fully built-out, free-standing 4,408-square-foot medical/dental office building in Grand Prairie, Texas, centrally located 22 miles southwest of downtown Dallas and 26 miles southeast of downtown Fort Worth. Though the current use is for a dental office, the property is zoned PD267A (commercial development), allowing for a variety of medical and dental uses. The property is owner-occupied and will be vacated at closing, providing an ideal opportunity for another dental practice or any number of medical office users to utilize the property for their practice or an investor who works with medical office tenants to take advantage of an investment opportunity.
Listing Brokers:
Tyson Grona | tyson@tysongronagroup.com | 936.444.3635
Randolph Taylor | rtaylor@creconsult.net | 630.474.6441
https://properties.expcommercial.com/1253332-sale

A Look at Metro Cities Leading and Lagging in Apartment Rental Growth

National supply-demand imbalances in multifamily housing affect pricing, leading to varied rent changes in different metro areas over the year.

National imbalances in multifamily housing between supply and demand can influence pricing power, with certain metro areas experiencing either oversupply or undersupply. The differentiation in these areas impacts how much rents have shifted over the past year.

National overview: As per a new report from Yardi Matrix, a straightforward indicator of these imbalances is the year-over-year change in rent prices. On a national scale, single-family rents have decreased for the second month in a row, landing at $2,104, marking a 0.4% year-over-year growth. Occupancy, however, remains steady at 95.9%, indicating strong demand.

Leading metros for growth: Diving into metro-specific data, areas in the Northeast and Midwest showed strong growth, likely due to limited new constructions there compared to the Sun Belt and West. The top five metro areas witnessing the highest growth include New York City (5.6%), New Jersey (5.2%), Chicago (4.0%), Indianapolis (3.8%), and Kansas City (3.6%).

Metros with declines: On the flip side, metros in the Sun Belt and West experienced a decrease in rents. The bottom five metros, based on approximated data, were led by Seattle (with an estimated decline of around -4.7% or -4.8%), followed by Atlanta, Las Vegas, Phoenix, and ending again with Seattle's -2.5%.

Between the lines: When dissecting the data based on lifestyle and "renter-by-necessity," the top lifestyle regions were New York City, Kansas City, Chicago, New Jersey, and Boston. The most significant drops in this category were seen in Austin, Atlanta, Phoenix, Portland, and Nashville. In contrast, for renters-by-necessity, who typically have fewer choices, New Jersey led the growth, followed by Indianapolis, New York City, Chicago, and Miami.

➥ THE TAKEAWAY

Big picture: The world of renting isn't one-size-fits-all. Different cities are seeing shifting trends, and the whole picture can be complicated. While national averages provide a broader picture, dissecting the data by metro and renter type offers critical insights for investors. The pandemic's impact, coupled with shifts in capital seeking yield, has notably influenced the balance of supply and demand, particularly in lifestyle rentals.

Source: A Look at Metro Cities Leading and Lagging in Apartment Rental Growth

https://www.creconsult.net/market-trends/a-look-at-metro-cities-leading-and-lagging-in-apartment-rental-growth/

1120 E Ogden Ave

New Listing | Retail-Office For Sale Naperville IL
eXp Commercial is pleased to present to market 1120 E Ogden Avenue, a highly visible 10,860 square foot retail-office property on 1.26 acres in desirable affluent Naperville, Illinois, along the I-88 E-W corridor approximately 28 miles west of Chicago. The property is currently owner-occupied and will be fully vacated shortly after closing, with the seller seeking approximately 60 days of post-closing possession. Flexible B3 zoning allows for a number of retail and office uses, ideal for an investor, owner-user, or redevelopment of the property.
Listing Broker: Randolph Taylor | rtaylor@creconsult.net

https://www.creconsult.net/retail-office-for-sale-1120-e-ogden-ave-naperville-il-60563/

Multifamily's Complicated Supply Issue

The multifamily sector faces a complex supply challenge, with abundant ongoing development and varied implications across different locations and property types.

A Glut in Growth: Inside the Oversupply Problem in Multifamily Housing

The multifamily sector is experiencing a supply challenge, with an abundance of development in progress. However, this issue might not be as simplistic as it appears, with different implications based on location and property type.

Market segments: The impact of supply is not uniform, varying across low- to middle-income neighborhoods and wealthier suburban areas. Notably, affordable housing remains stable due to its long-term horizon and resilience against short-term market fluctuations. Rochelle Mills from Innovative Housing Opportunities indicates that public funds lend stability to this segment, with occupancy rates being consistently high.

Historical context: Jay Lybic of CoStar Group emphasizes that the current supply issue differs significantly from previous ones, particularly in terms of which market segments feel the impact. Unlike scenarios in the late 1990s, the present situation sees the “pain” of oversupply being mostly felt at the top end of the market, safeguarding the middle market to some extent due to a substantial price difference.

The demand: Despite high deliveries, long-term projections by institutions like the National Multifamily Housing Council estimate a requirement of 3.5 million new multifamily units over the next decade. Paul Fiorilla from Yardi Matrix notes that while the number of units under construction is substantial, rising rents — up 22% combined in 2021 and 2022 — indicate robust demand, as the market seeks to compensate for under-building following the global financial crisis.

Regional insights: The geographical aspect is pivotal in understanding supply and demand dynamics. While the Sunbelt is grappling with an oversupply, other areas, especially in the Midwest and Northeast, show stability or even a surge in their markets. The supply tends to be concentrated in rapidly growing markets like Austin and Phoenix, where population and job growth seek to balance the increasing housing units.

➥ THE TAKEAWAY

Big picture: Although oversupply poses short-term challenges, several experts predict the market will stabilize in the long run, as new units are gradually absorbed and demand stabilizes. Consequently, the forthcoming 12-18 months may be balanced as the market navigates through rent growth and stable investment options. Industry insiders like Jay Parsons suggest that a strategy centered around long-term views and patience will likely be rewarded, pointing to a potential equilibrium around 2025 when supply catches up.

Source: Multifamily’s Complicated Supply Issue

https://www.creconsult.net/market-trends/multifamilys-complicated-supply-issue/

What the Construction Lull Means for the Apartment Sector

This year sees a marked decline in new apartment construction, attributed to elevated interest rates, reduced rents, and overbuilding worries in select regions.

Higher Rates and Falling Rents Spark a Decline in New Apartment Developments

Construction of new apartments has experienced a significant decline this year due to higher interest rates, declining rents, and concerns about overbuilding in some areas.

By the numbers: According to the Census Bureau, apartment building starts fell by 41% in August, compared to the same month the previous year, reaching a seasonally adjusted annual rate of 334K units. This decline, only seen once since the subprime housing crisis, is expected to result in approximately two years of reduced building, as Greg Willett, first vice president at Institutional Property Advisors, predicted.

Construction pause: The market is expecting a surge in rental building openings for the next two years, the highest since the 1980s. This influx of new supply has caused apartment vacancies to rise and rent growth to flatten or decline in several areas. As a result, apartment builders are pausing construction in order to assess the profitability of their projects compared to safer investments, as well as to evaluate the impact of existing buildings in the market.

Financing freeze: The cost and scarcity of construction financing have become significant obstacles for builders. Banks, now holding increased reserves to support troubled property loans, are lending less frequently and tightening standards. Interest rates for construction loans have doubled, climbing from 4–8%. This financing crunch has made it difficult for developers to raise equity from investors uncertain about the future value of completed projects.

Regional impacts: The decline in multifamily starts is most evident in areas that experienced substantial construction during the pandemic. Denver, for example, saw a 66% drop in starts for new apartments in 2Q23 compared to the quarterly average since 2021. This drop in new construction is attributed to stagnant asking rents and the uncertain potential for rent inflation before completion. Additionally, developers in the Dallas metro area have scaled back in untested neighborhoods.

➥ THE TAKEAWAY

Slowly slowing down: The future of apartment buildings heavily depends on interest rate fluctuations. If rates stabilize or fall more in coming quarters, developers and lenders will likely gain confidence and resume stalled construction plans. Another factor favoring the apartment building market is the continuous increase in the price of for-sale homes. This rising affordability gap should drive demand towards rentals for the foreseeable future.

Source: What the Construction Lull Means for the Apartment Sector

https://www.creconsult.net/market-trends/what-the-construction-lull-means-for-the-apartment-sector/

Is Preferred E`quity Multifamily's Savior?

Capital scarcity in multifamily is leading developers and operators to explore alternative funding, with preferred equity gaining popularity due to its higher-than-average returns.

Preferred Equity Steps in to Save Stalled Deals and Boost Returns in Multifamily

Preferred equity, a financing tool in the multifamily sector that had once been sidelined, is witnessing a resurgence due to the scarcity of capital in the sector, prompting developers to explore alternate and niche funding sources.

Shifts in financing: Conventional lenders are becoming increasingly cautious, limiting their funds due to factors like surging interest rates, regulatory pressures, and heightened risk perception. This has led to substantial financing gaps. Companies like Canyon Partners Real Estate and other operators have recognized the benefits of preferred equity investments, attributing its allure to its debt-like qualities, such as fixed terms and priority repayments, while occasionally allowing for profit participation.

New players in town: The preferred equity market has evolved significantly in the past year. New entrants, including REITs, family offices, and foreign investors, are now participating. Chinmay Bhatt of Berkadia highlighted the market's fragmentation and changing interest rate environment as challenges, pointing out the need to consult a broader range of groups to get optimal solutions. Despite these challenges, certain deals remain appealing, especially those that can offer higher current pay rates to the preferred equity.

Source: Federal Deposit Insurance Corp.

Comparison to other funding methods: While preferred equity is gaining traction, it still faces stiff competition from other funding options, especially mezzanine debt. Both fill similar roles in the capital stack, sitting between mortgage debt and common equity. However, preferred equity has an advantage as many mortgage lenders disallow subordinate debts like mezzanine but permit preferred equity. This growth in interest around preferred equity also means investors in this space can be more selective about credit choices, maximizing their investment potential.

➥ THE TAKEAWAY

Multifamily’s lifeboat? Multifamily's traditionally robust performance is facing challenges, pushing sponsors to reconsider preferred equity despite past reservations. In the face of rising interest rates and potential rent reductions in certain markets, experts anticipate an even more prominent role for preferred equity, especially with over $250 billion in multifamily maturities expected in 2024. As the need for refinancing grows, preferred equity is proving essential in bridging the financial gap many owners face.

 

Source: Is Preferred Equity Multifamily’s Savior?

https://www.creconsult.net/market-trends/is-preferred-equity-multifamilys-savior/