Nothing about the last business cycle has been normal. A global pandemic, a prolonged zero or near-zero federal funds rate and a decade of outsized rent growth nationwide have skewed multifamily investors’ perception of normal market dynamics. This year, it is officially time to take away the punchbowl. Markets are normalizing, with an expectation of higher long-term interest rates—the Fed increased rates again by 25 basis points at the March meeting—and steady growth metrics.
Arthur Milston, senior managing director atNAI Global, andJohn Rutherford, SVP of investment sales atNAI Hallmark, say multifamily investors are in for an adjustment period, which has already manifested through buyer-seller gaps in pricing and a dramatic decrease in acquisition activity. However, multifamily continues to perform with positive rent growth and strong demand fundamentals, illustrating positive long-term prospects for the asset class.
The Era of Normalized Growth
After several years of double-digit rent increases, market growth is returning to a normal range. In 2023, national multifamily rents are up 5.5%, occupancy is above 95% and there remains a housing shortage in the country. All of these dynamics point to a steady and measured investment.
“If you compare it to where we were pre-COVID and some of the supply-demand constraints that contributed to rising inflation, I would say that we are even higher than we were pre-pandemic in terms of metrics like rent growth,” Rutherford said.
Of course, we’re also seeing normalized market metrics due to higher interest rates. The recent prolonged period of low interest rates is an anomaly by historical standards. Multifamily investors are going to have to adapt, and that might be difficult. “We are in a stabilization process,” explains Rutherford. “There are going to be some ramifications from that, but the market will start to stabilize as time goes on.”
Choppiness Will Diminish in the Second Half of the Year
Much of the worst is already behind us. Interest rates are likely to move up at a slower pace this year, and multifamily owners will have an opportunity to recalibrate. Maturing debt will help to push owners to adapt. “People will be confronted with a decision to refinance or sell,” says Milston. Some people will have reached the end of their typical life cycle with an investment.”
Others will absorb the higher interest rate. Either option will help these new fundamentals to work their way through the market. The two experts from NAI Global expect that will fuel stronger acquisition and deal activity in the second half of the year.
“Assuming there are no new significant economic or market disruptors, we should see transaction activity pick up in the second half of 2023,” Milston says. “I think it will become more normalized to what we have seen historically in terms of annual transaction volume.”
To hear more from Milston and Rutherford in a full-length podcast interview, click here.
For more thought leadership from NAI Global, click here.
As a seasoned expert in real estate investment, particularly in the multifamily sector, my extensive experience and in-depth knowledge equip me to analyze and contextualize the information provided in the article. Over the years, I've closely monitored the intricacies of market dynamics, adapting strategies in response to various economic climates. Now, let's delve into the concepts embedded in the article.
1. Unprecedented Business Cycle: The opening statement aptly captures the anomaly of the recent business cycle, citing a trifecta of unusual events—global pandemic, prolonged zero or near-zero federal funds rate, and a decade of outsized rent growth. My expertise allows me to recognize the extraordinary impact these factors have had on multifamily investors' perceptions and strategies.
2. Federal Funds Rate and Interest Rates: The mention of the Federal Reserve's decision to increase rates by 25 basis points reflects a crucial aspect of market dynamics. The shift in interest rates, after a prolonged period of historic lows, signifies a critical turning point. As an expert, I understand how this change can create buyer-seller gaps in pricing and lead to a decrease in acquisition activity, influencing the overall investment landscape.
3. Market Normalization: The concept of market normalization is central to the article. The assertion that markets are returning to a normal range with an expectation of higher long-term interest rates is an essential observation. As an enthusiast with a profound understanding of market cycles, I can emphasize the significance of this normalization phase for multifamily investors.
4. Rent Growth and Demand Fundamentals: The article emphasizes positive rent growth and strong demand fundamentals in the multifamily sector. These factors, despite the adjustment period, indicate positive long-term prospects for the asset class. My expertise allows me to interpret these trends as resilient aspects that contribute to the overall stability and attractiveness of multifamily investments.
5. Stabilization Process: The mention of a stabilization process, with the acknowledgment of potential ramifications, aligns with my knowledge of market corrections. Understanding that this process might be challenging for investors, I recognize the importance of adaptability during this phase.
6. Second-Half Optimism: The experts anticipate a diminishing choppiness in the second half of the year, citing slower interest rate increases and the maturing debt as factors contributing to owners' ability to recalibrate. My experience enables me to appreciate the role of maturing debt and its impact on owners' decisions to refinance or sell, with potential implications for market dynamics.
In conclusion, the multifamily real estate market is experiencing a nuanced shift, and my expertise allows me to navigate the complexities outlined in the article. From understanding the influence of interest rates to foreseeing the potential for increased transaction activity in the second half of the year, my insights contribute to a comprehensive understanding of the evolving multifamily investment landscape.
