The multifamily investment landscape has experienced significant shifts in the last year with higher interest rates, challenges securing debt for new developments, and softening fundamentals across asset classes. Despite the obstacles, CBRE’s 2024 Global Multifamily Investor Intentions Survey recently revealed upbeat investor sentiment as multifamily remains the top acquisition target. Fogelman, like many others, has adapted new financial strategies amid this shift, remaining strategic and prudent in its approach toward new investments. Here are five considerations in looking ahead at the multifamily investment landscape:
1. New Realities of the Market
The current economic landscape has certainly impacted the attractiveness of multifamily investment. Compared with 2022 peak levels, the asset prices have declined by 20% to 30%, while the cash flow profile remains just as challenging as it did two years ago. As a result, many investors, including Fogelman, have remained conservative despite the more attractive price/pound of apartments for new acquisitions over the past 18 months.
While new CBRE research suggests that fundamentals remain challenged with near record high supply levels delivering in most markets, we’re expecting improvements in 2025 amid slowing completions, bolstered by a resilient macro-economy.
2. Resilient Macro-Economy Despite CRE Recession
Economic data points to a soft landing, rather than a recession for the broader economy, but interest-rate-sensitive sectors, such as commercial real estate, face what feels more like a traditional downturn. Key inflation measures are trending down, but at a slower pace than expected, which is pushing out the timing for rate cuts from the Fed. On the positive side, some of the existing headwinds, such as increased property insurance rates, have eased up for our industry with insurance markets showing signs of improvement.
The overall economy is faring better than it did during the Global Financial Crisis, and the multifamily sector is experiencing a more stable environment compared with the tumultuous conditions of 2008. Many of the larger management players, including Fogelman, have become uniquely positioned to navigate the new realities of today’s market. The wealth of tangible and reliable real-time data gleaned from managing an extensive portfolio lends itself to the anticipation of future trends and confidence in adapting effectively to the evolving market conditions.
3. Top Risk-Adjusted Opportunities: Outlook for Midwest and Sun Belt Markets
While migration patterns have recently moderated compared with the mass movement immediately following COVID, the overall shift from high-cost urban centers on the East and West coasts remains. According to CBRE, despite softening fundamentals from a glut of new supply, Sun Belt markets are once again the most attractive for investment. Additionally, Midwest markets are displaying strength as they experienced a positive year-over-year rent growth of 2.7%. The metropolitan statistical areas that previously ranked in the bottom quartile for rent growth over the past decade are now in the top quartile primarily due to lower levels of new construction. “Steady Eddy” markets such as Kansas City, Missouri, and Louisville, Kentucky, are outperforming the growth markets such as Atlanta; Nashville, Tennessee; and Dallas, despite the migration patterns favoring the Sun Belt.
4. Transaction Activity: Exceptionally Low but Should Ramp Up Significantly
While the last 18 months have seen a dearth of transaction volume compared with historical standards, there are positive signs of change coming in the second half of 2024 or early part of 2025. Apartment fundamentals are expected to strengthen as the supply wave delivers and units absorb. Stronger fundamentals will support buyers’ willingness to transact at negative leverage as the ability to grow revenue accelerates. Additionally, if we see interest rates consistently hover closer to the 5% range, expect cap rates to compress into the mid- to high 4% range, which will open the flood gates on sale activity. Blackstone’s recent $10 billion multifamily investment is also seen as a positive signal to the rest of the multifamily market as the return of large portfolio transactions has been missing since the run-up in treasuries.
5. Staying Ahead in a Slower Market
In a slower market where investment opportunities are limited, multifamily investors can stay ahead of the curve by leveraging third-party research and relying on internal data. Real-time trends and insights derived from managing a large portfolio can provide a competitive advantage and help make informed decisions despite the lack of available opportunities.
