Multifamily Outlook

The multifamily sector was affected by a combination of rapidly expanding interest rates and historically low cap rates - below 4% in some cases - which created an environment of negative leverage.¹⁶This was further influenced by stagnant 0.9% year-over-year rent growth in 2023.¹⁷ As interest rates continued to rise throughout the year, bids evaporated, which resulted in a 60% year-over-year fall in single-asset apartment sales by November 2023, according to data by MSCI's Real Capital Analytics.¹⁸ As a result, Green Street shows that pricing has now dropped to 30% below its peak.¹⁹ To put this into perspective, this recent drop in multifamily prices is roughly in line with the decrease that occurred during the Great Recession, which according to the Urban Institute, dropped 40% from the peak in early 2007 to its trough in Q3 of 2009.²⁰

Figure 7: Multifamily Market Fundamentals by Year with Forecast

Source: Multifamily, United States, CoStar Group Data, January 2024.

We expect that 2024 will be marked with lower asset prices and slightly lower borrowing costs. Because CoStar’s rent growth forecast is tepid and set to rise by 1.5% during H1 2024, we don’t expect a resurging prospect of growth to catalyze a V-shaped recovery (meaning a sharp rise back to a peak). While this is higher than the rent growth for 2023, CoStar data shows that some of the markets that previously experienced high rent growth in 2021, such as Austin, Orlando, Atlanta, Raleigh-Durham, and Phoenix, are still expected to see negative annual rent growth before potentially turning positive in 2025.¹⁷

We also anticipate that multifamily operating expenses may exceed revenue growth in some cases because of increased labor costs, property taxes, and insurance expenses. Research by the data firm Trepp indicates that property insurance rates have increased nationwide by approximately 13.6% on average from 2021 to 2022, with some markets seeing an increase of up to 28%. Additionally, property taxes have gone up across the country by as much as 15.3% between 2021 and 2022.²¹

The national multifamily market is oversupplied in the short term, but with fewer projects breaking ground due to higher construction costs, recent capital market turbulence, and general project delays, we anticipate the market will likely level out, gradually transitioning back to undersupply. Our multifamily supply outlook aligns with that of Linneman Associates’, who forecast a net shortage of roughly 648,000 multifamily units (at the national level) at year-end 2024, increasing at least through 2027 due to Fed-induced capital market turbulence.¹⁸ In our experience, it typically takes around two years for projects to navigate the entitlement process and commence development, though it depends on the project and its business plan. Given that much of the capital market instability began in the summer of 2022, we anticipate that new deliveries will gradually decline at year-end 2024, extending into the next few years as the capital markets show signs of stabilizing.

CrowdStreet’s Strategy

While we expect compelling multifamily opportunities to remain relatively scarce over the next few months, there are two main ways we are approaching multifamily in H1 2024.

First, we expect some market capitulation in the multifamily sector in H1 2024. To the extent owners throw in the towel and transact at prices that appear substantially below their peak, we think this scenario may offer better acquisition opportunities in 2024. According to Colliers and Mortgage Bankers Association, a substantial amount of debt is expected to mature this year amidst debt markets that are still expensive.²³ We expect that this will create an environment where operators who were kicking the can down the road may no longer be able to do so, making them forced sellers.

We believe a key underwriting element of discounted transactions is their ability to flip from negative to positive leverage within the first year of acquisition, assuming the asset is appropriately repriced, stabilized with strong occupancy, and exists in a primary or secondary market with above-average rent growth. We are typically considering deals for the Marketplace with unlevered yields on multifamily assets of 5% or greater or a path for the asset to achieve a 6% or greater yield on cost (YOC) within the first year of the hold period.

Second, while we understand that it will be challenging to locate a viable development deal in today’s environment, we will keep an eye out for potential opportunities that can equate to roughly 6+% untrended or 6.5+% trended YOC. We will still review such opportunities, despite concerns related to high construction costs, because we believe developers who can successfully break ground in today’s environment may be among the relatively few who deliver properties throughout 2026. Projects delivering in 2026 may do so among a relative dearth of new supply which may potentially attract relatively higher demand.

When all is said and done, the demand for housing is largely non-discretionary, meaning it is one of the basic human needs, which may help keep demand levels for multifamily somewhat consistent. High interest rates can challenge many individuals to afford a home, potentially leading some prospective homebuyers to remain in the rental market, which could help support demand for multifamily in the future. We expect this trend to support the demand for multifamily properties in the long run.

16. “Higher Rates Push Up Prime Multifamily Cap Rates in Q3”, CBRE.

17. CoStar, Markets, Multifamily, Data Export, December 2023.

18. Capital Trends, US Apartment, MSCI Real Capital Analytics, November 2023.

19. CPPI, Green Street, January 2024.

20.Urban Institute, “Rental Market Stresses: Impacts of the Great Recession on Affordability and Multifamily Lending,” July 2011.

21. “Breaking Down Multifamily Property Operating Expenses Across the US,” Trepp, August 2023.

22. “The Linneman Letter, Winter 2023-24,” Linneman Associates, 2024.

23. “Quick Hits | Loan Maturities are Here,” Colliers, April 2023.