Multifamily Market Faces Crosscurrents Amid Shifting Conditions

Good morning,

Multifamily market faces crosscurrents amid shifting conditions, the hidden factor behind offices value decline, and how rising rates have upended multifamily’s safe haven status. Let’s delve into today’s topics.

📈 Market Update

🏘️ Multifamily Market Faces Crosscurrents Amid Shifting Conditions

The multifamily market remains fundamentally healthy, with occupancy rates ~93-95% nationally, indicating continued strong demand. Occupancy rates have however moderated slightly from peak levels with over 1M units under construction. Major metros like Miami, Austin, and Phoenix face risk of oversupply where construction is outpacing absorption. Overall, multifamily still benefits from favorable demographic trends and unaffordable home prices.

Capital Markets Dislocation Creates Repricing Pressure:
Dislocation in capital markets has slowed investment activity significantly. Higher rates and lenders tightening standards have led to repricing, with cap rates rising towards historical norms after recent compression. Operating pressures like spiking insurance costs and hurting NOI growth. Upcoming maturities of floating rate and bridge debt present further challenges.

Outlook Hinges on Debt and Market Repositioning:
Much depends on how effectively owners navigate upcoming debt maturities, with over $1T in multifamily loans maturing through 2027. Historical cap rate premiums between asset types may reemerge, but uncertainty persists around how fundamentals, policy, and capital flows will evolve.

🏢 The Hidden Factor Behind Offices Values Decline

Well before Covid-19, the office sector was struggling with underperformance and lackluster returns. A key factor was the escalating concessions and tenant improvement packages landlords paid to attract and retain tenants. Starting around 2015, owners began spending heavily on amenities and TI allowances to lure residents. This obviously ate into NOI, particularly as expenses increase and leave office properties cash-flow constrained.

No Relief as Concession Spiral Continues:
Concessions have shown no signs of easing as leasing demand withers. TI improvements have climbed from around $67 PSF in 2019 to $95 PSF today. The persistent competition to win tenants continues to pressure office returns.

🏘️ Rising Rates Have Upended Multifamily’s Safe Haven Status

For years, multifamily was seen as a safe investment with steady cash flows. However, massive amounts of cheap debt led to overpriced acquisitions, and many investors made highly leveraged bets banking on ever-rising rents. Major players like Blackstone and regional syndicators like Tides and Nitya have been exposed as interest rates have spiked.

The Perfect Storm:
Spiraling expenses, slowing rent growth, maturing debt, and property devaluations have compounded apartment owners’ problems. Delinquencies, and the incoming supply wave pose further risk. Mass distress could ensue, stay tuned!

✍️ Further Reading

• CLO Market Round-Up (Trepp)

• CMBS Loan Loss Report - Part 2 (Trepp)

• Property Loans Are so Unappealing That Banks Want to Dump Them (BBG)

• Market Sentiment Around Commercial Real Estate is Worse Than Reality, Says RXR’s Scott Rechler (CNBC)

• Multifamily Demand ‘Clearly Rebounding’ for Cushman & Wakefield (GS)

• This is How Bad Retail and Office Valuations Have Gotten (GS)

• Single-Family Rental Rates Have ‘Seemingly’ Peaked (GS)

• As They Mature, Food Halls Go to College and Move Out to Suburbs (CS)

📊 Chart of The Day