Today’s rates for a wide variety of multifamily loans
Check Today's Rates →
The State of the Multifamily Market in 2024
Many challenges await investors. But that doesn’t mean there aren’t excellent multifamily investment opportunities out there. Here’s what you need to know.
- Economic Indicators
- Multifamily Fundamentals
- Rent Growth
- Occupancy Trends
- Absorption
- Capital Markets
- How to Read the Rest of the Year
- Interest Rate Changes for the Rest of 2024
- Occupancy’s Impact Going Forward
- Where to Focus
- Lower-End Performers
- Work-From-Home Suitability Matters
- Cost Reduction Is Key
- Conclusion
- Get Financing
It’s about time I got back to an analysis piece on the state of multifamily. It’s an interesting time, and not completely in a good way, but multifamily still offers some great opportunities if you know what you’re looking for.
This piece is just a bit of a check in on a few key indicators that matter for multifamily investors. Further down, I’ll get into a bit more detail about why some of these matter for the rest of the year.
Don’t have the time to read 1,800+ words? No problem. In one (slightly lengthy) sentence:
Multifamily’s facing many challenges, from tepid rent growth to a big rise in costs, and we’re not likely to see any major relief in the form of significant interest rate drops or increases in occupancy, but the sector is — in most metros — at least moving in the right direction.
Keep reading for more details.
Economic Indicators
I can’t start talking about the economy without going into interest rates. With the Fed continuing to pause rates, it’s looking like we’re set to stay in a significantly elevated rate environment for a longer time. This, obviously, isn’t great for multifamily investors. Even though there are some great loan products out there with relatively low rates, nothing is going to compare to that fixed-rate note you could have used back in 2021. Still, it does seem likely that we’ll see at least one or two rate cuts this year, provided inflation gets a little more under control.
In terms of jobs, things are looking very good. Job growth is more useful to look at for the market level, of course, so your results may vary, but at the national level, it’s promising: On average, employers have added 233,500 jobs every month for the past year, according to data from the Bureau of Labor Statistics. The most recent month, April, was a bit weaker (with 175,000 jobs added), but this is underpinned by a low unemployment rate at 3.9%, only a slight increase from the 3.4% and 3.5% rates reported in early 2023.
Multifamily Fundamentals
The multifamily sector’s fundamentals (by which I specifically mean rent growth, occupancy, and absorption) aren’t exactly confidence inspiring right now, but I’d stop short of calling them the stuff of nightmares.
Rent Growth
Rent growth has gradually been coming back. Rents are still under what they were at their peak last summer, but the difference is now down to a couple dollars at the national level, according to Yardi Matrix’s national report from April. Growth hasn’t been rapid, with rents up only 0.7% in the past 12 months, but it likely signals ongoing recovery. Sure, it’s not 2021 anymore, but at least we’re heading in the right direction.
Occupancy Trends
Occupancy has been holding steady so far this year, right at 94.5%. No major city saw any increase in occupancy rates, from the Matrix report I referenced earlier, and this is somewhat concerning…but it can be explained.
It all comes down to that huge wave of multifamily construction that kicked into overdrive a few years ago. Now that rent growth has been a bit more tepid, construction starts have slowed to a crawl, yes. But the pipeline that’s been actively under construction is still delivering in large part, and that’s flooded many markets with new inventory, dropping occupancy accordingly.
Absorption
Demand is strong, though, as the numbers show. In the first quarter of the year, 72,800 units were absorbed nationwide, which could put the market on track to hit around 300,000 units absorbed this year. This is a far cry from the more than 600,000 units absorbed in 2021, of course, but these aren’t bad numbers. It does, however, mean that occupancy will likely keep a bit lower in the near term while the flood of new units are absorbed.
Naturally, with all three of these metrics, there’s significant divergence at the metro level. For example, in terms of rents, New York City neared 5% growth over the year, compared to Austin on the other hand, where market rents were down around 6%. The higher-level figures here are purely to give an overall snapshot, so be sure to take care with your market (and submarket) research.
Capital Markets
Loan originations and multifamily deals have slowed significantly since rates began climbing, but they appear to be at or near the bottom. First, to financing: A report from the Mortgage Bankers Association shows that multifamily loan originations are far from dead — $264 billion in loans closed in 2023, for example, the largest of any commercial real estate type — but there hasn’t been a ton of positive headway this year.
That isn’t surprising: Rates are still considered high, and while many are preparing to live in this higher-rate environment, with potential rate cuts on the horizon, most borrowers are preferring to kick the can down the road and look for maturity extensions if possible.
That said, some financing types with advantageous terms (even looking outside of rates), like Fannie Mae, HUD, or Freddie Mac loans, have been a subject of renewed interest from multifamily investors looking to lock in longer-term loans.
This has had knock-on effects for multifamily investment, with the possible exception of properties with assumable financing (though these aren’t as common as I’d like). Deal velocity has slowed over the past couple of years, and it likely won’t begin to really pick up until we start seeing interest rates fall.
How to Read the Rest of the Year
So how will the rest of the year unfold? It all hinges on two main factors, in my opinion: interest rate changes and future occupancy shifts. This section that follows is more of a primer on how to read these two factors — so if you’re well versed, I won’t be at all offended if you skip past the next bit.
Interest Rate Changes for the Rest of 2024
Rate cuts would be a boon for virtually any multifamily investor. Lower interest rates, at their most basic level, mean cheaper financing. Cheaper financing costs are great for investment returns, obviously, but they also increase the viability of many types of investments and developments that get ignored when rates are higher. Affordable housing developments, for example, would be much more likely to pencil. The same goes for investments. Buyers are (broadly) more willing to pay higher dollar values when they can make it work with lower-cost financing.
What if rates hold steady, though? It’s not the end of the world. Loans will still mature and need to be refinanced — or properties will need to sell. This will create pressure on sellers to lower pricing (gradually, at least), until they find a spot they can meet buyers at.
It’s not ideal, but most respected analysts (as of when I wrote this, in mid-May) aren’t anticipating more than one or two rate cuts for the year. Those cuts will be very unlikely deep cuts, so I wouldn’t bet on a total shift in the financing landscape. The rates we got used to between 2020 and early 2022? Those won’t be back for a long while, unfortunately.
Occupancy’s Impact Going Forward
Occupancy is a tricky one to pin down. It’s an indicator that is both leading and lagging, in some ways: Rising occupancy means (typically) rising rents are on their way, with falling occupancy generally leading to stagnant rents.
Which factors commonly lead to occupancy changes?
First, development activity. If you have a massive number of units being completed in a market with no massive shifts in population (or massive employment gains), you’ll see occupancy fall, because some of those new units simply won’t be rented (or, more likely, renters will move from older units to the new, and those will be left vacant). Similarly, if you’ve got a tight multifamily market with not a lot of construction, occupancy will climb (and rents will, too).
Second, the job market and overall economy can have a big impact on occupancy rates. When the economy is booming, and people are earning more money, household formation picks up. Household formation is a super-clinical term that just means people are moving out on their own, creating new households. That can be as couples or families or even just someone leaving her bedroom at her parents’ house to get their first apartment after college.
Third, population growth has an impact on occupancy. Just think of a place like Austin. A couple decades ago, it was growing at a reasonable pace, but in the last 10 years the metro has absolutely exploded. Until very recently, this has led to a similarly explosive rise in occupancy, as multifamily developers simply couldn’t keep up with the demand for housing. Today it’s a bit of a different story — the city is facing some occupancy challenges due to the huge amount of development activity — but the rise in population means that Austin’s multifamily investments will once again be in the spotlight once construction tapers off.
There are so many other factors that affect occupancy — local regulations, the age of the housing inventory, affordability issues, just to name a few — but I’ll not get into them in this piece.
Where to Focus
There are a few trends to pay attention to this year (and carrying over from last).
Lower-End Performers
First, lower-end properties (think Class C or D, workforce housing, etc.) are performing marginally better than high-end assets. In the past couple of months, upscale rentals have come back into positive rent growth territory in many markets, but I’d be hesitant to suggest they’re safe plays, given the vast majority of new deliveries will further dilute luxury inventory.
Work-From-Home Suitability Matters
Properties that are suitable for people working from home, especially in the mid- to upper-scale range are still benefiting from higher occupancy and, subsequently, higher rents and stronger performance. This doesn’t mean your property needs to have a business center, but apartment buildings equipped with suitable space to set up a workstation (either within or outside the unit) stand to benefit, as WFH policies are still going strong for a significant chunk of the U.S. workforce. These assets will likely command both higher rents and valuations.
Cost Reduction Is Key
Rent growth isn’t expected to pick up a lot, so the difference needs to be made up in cost reductions. That’s a tough job, even just looking at insurance premiums. Multifamily insurance costs in most parts of the country are up by at least 30% year over year, which can turn a profitable investment unprofitable pretty quick.
Same goes with property management and maintenance costs. Marketing costs. Property taxes. The list goes on.
There are some effective ways to address out-of-control insurance costs through Janover Insurance Group now, thankfully. And there are ample ways to lower property management costs, provided you don’t defer maintenance to pinch pennies — you don’t want to deal with the headaches and financially catastrophic issues that can erupt as a result.
The main thing to have is a plan for how you’re going to keep your costs on a manageable level for the rest of the year. If you don’t, you’re only setting yourself up for trouble in the very near future.
Conclusion
In a few words, multifamily’s having a little trouble but if you know what you’re doing, you’ll be fine — whether you’re just operating an existing portfolio or buying up new properties. The key, beyond everything I’ve spoken to already, is to be vigilant, adaptable, and proactive — especially when it comes to managing your costs and staying aware of market conditions.
- Economic Indicators
- Multifamily Fundamentals
- Rent Growth
- Occupancy Trends
- Absorption
- Capital Markets
- How to Read the Rest of the Year
- Interest Rate Changes for the Rest of 2024
- Occupancy’s Impact Going Forward
- Where to Focus
- Lower-End Performers
- Work-From-Home Suitability Matters
- Cost Reduction Is Key
- Conclusion
- Get Financing