Three Things To Keep In Mind When Assessing The Current Multifamily Market

I’ve been hearing from a lot of clients that they’re staying on the sidelines. Investors may find a number of reasons, among them being the rise of cap rates and cost of capital, as well as sellers’ expectations not being met. Investors are inundated with the negative things in the market right now. The result is that they are moving to the sidelines until the market feels “more stable.”

But I believe money is made when you make contrarian moves.

Here are three basic concepts to keep in mind as you are assessing whether or not to be active in the current multifamily market. First, I find that interest rates are not going to change significantly in the near future at this time. Second, I believe rents are going to continue to increase. And third, occupancy is at historic highs.

There won’t be extreme fluctuations in interest rates.

Interest rates fell slightly when the 10-year came down, but only nominally. In my opinion, if interest rates are not going down significantly, they’re either going to stay stagnant or they’re going to go up. Simply put, I believe there’s no reason to wait thinking that you’re going to have a better scenario anytime in the near future. Sitting on the sidelines because of interest rates doesn’t really make sense.

Rent isn’t going down.

I believe rent is going to continue to increase. Everyone is worried about inflation, wage and salary increases, and the cost of running or constructing multifamily. These are valid concerns. But keep in mind that all ships rise with the tide—meaning rents should also increase. This means revenue should rise along with increased rent prices.

Occupancy remains high.

Occupancy is at a historic high because of a lack of housing. In almost every market, there are more people who want to rent than there are available units for them to rent. Econ 101: supply and demand. In the near term, there is not enough construction or scalable, affordable solutions to change the basics of supply and demand between tenants and apartments. As a result, I don’t see the occupancy rate going down in the near future.

Final Takeaways

I find the idea that sellers’ expectations simply are not conforming to the market to be upside down. Other than refinance situations for loans coming due on properties purchased two to four years ago, I predict that values are unlikely to shift given past patterns in the market. Prices are not going to reset at a lower level. I don’t think it’s sellers who need to adjust their expectations. Investors need to adjust their expectations.

If you are considering investing in multifamily, it’s important research the market you are interested in. You can also consult with local professionals—brokers, lenders, appraisers—to help build your understanding. Be sure to stay up to date on the rent and occupancy levels and get second opinions on the stability of interest rates. You will most likely also find local trade associations of multifamily owners you can join to learn all the nuances of your local market.

But I find that the timing is good right now, as outlined above, to invest capital in multifamily. The way I see it, all the fundamentals remain in place for multifamily to stay the leading asset class for commercial real estate investment. There is no reason to wait.

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Lee Kiser