Multifamily real estate fund manager Origin Investments has released its predictions for the new year. Although the industry will face uncertainties, including an anticipated recession and higher interest rates, “once-in-a-generation” opportunities will exist for investors to grow their portfolios, according to Origin.
Origin anticipates these opportunities coming from senior debt and preferred equity investments as well as distressed value-add property acquisitions. It also noted that strong long-term fundamentals and the expectation that Class A multifamily rent growth will return to historical levels will counter geopolitical and economic uncertainties.
“The volume of variable-rate bank loans—made when SOFR was 0% and the 10-year Treasury note yield was below 2%—coming due in 2024 will create a generational opportunity in senior debt and preferred equity investments,” said David Scherer, co-CEO of Origin Investments. “Despite uncertainties, it remains a mistake to stay out of the multifamily investment market in 2024.”
The company’s 10 multifamily predictions are based on Multilytics, its proprietary suite of machine-learning models as well as its industry track record and boots-on-the-ground experience across the nation:
- Interest rates will stay high, with no expectation for a substantial drop until inflation is slowed further.
- A mild recession will finally occur in the latter half of 2024 and deepen in 2025—although its depth and breadth will depend on actions taken by the Federal Reserve and Congress.
- Fundamentals will remain strong, with strong demand and absorption likely to remain for years despite record supply coming online. This is attributed to the price discrepancy between renting and buying, plus the nation facing a housing shortage. “It’s a really tough time to buy a home, and it’s a real conundrum,” Scherer said. “Many people want to buy, but with inventories low, mortgage rates at or above 8%, and current homeowners unwilling to trade in their 4% mortgages, there is a supply drought and prices remain high. That’s bad for potential home buyers but good for multifamily investors.”
- There will be a 12- to 18-month period before new construction gains significant momentum due to the challenging real estate lending environment and a potential rise in defaults on expiring debt.
- Multifamily valuations will fall by as much as another 10% on top of recent declines since rents will remain flat or will see low growth while operating costs may continue to escalate. “With expenses rising faster than revenue, equity multiples are falling because of interest rates,” added Scherer. “Many owners will be underwater on variable-rate loans that come due in 2024 and were made at much lower interest rates than those offered on refinancing.”
- Class A multifamily rents will rise to historic levels—generally within a 2% to 4% range—by the third or fourth quarter of 2024, with rent growth coming back to 2022 levels.
- More distressed multifamily assets will emerge in the second half of the year. Falling valuations and variable-rate bridge loans coming due will provide opportunities to recapitalize or buy value-add assets in growing markets at or below replacement cost pricing.
- Even as interest and mortgage rates are expected to remain close to 6% in 2024, home prices will start to correct in the new year.
- High insurance rates aren’t going anywhere in 2024 and will continue to impact lending, valuations, cap rates, net operating income, and more. Another dramatic repricing isn’t predicted, but rates aren’t projected to decline either.
- Investment capital will go to the largest providers, and this will trigger consolidations among developers, general partners and sponsors, private equity managers, and property managers. “When things get crazy, investors seek out bigger names with solid reputations and proven track records,” Scherer noted. “It’s all about the balance sheet.”
