Report: Multifamily Investments and Loan Originations Decline; Expenses Increase

In the face of increasing home prices and record-level interest rates, more people are turning to apartment rentals. Deliveries and absorption are on the upswing (with rent growth a mixed bag). However, things are a little different on the investment and operational sides.

The takeaways from Newmark’s Q2 2023 United States Multifamily Capital Markets Report include an increase in operational expenses, while loan origination volumes and acquisition activity have declined year-over-year.

Higher Operational Expenses

Multifamily expenses increased 8.3% year over year. The culprit? Hikes in insurance costs to the tune of 28.6%, according to Newmark analysts. Insurance growth was nearly 30%, while other operational expenses (management and others) increased by double digits. These higher expenses continue putting pressure on operations.

Declining Investment Sales

It’s no secret that investment sales on all asset classes continue to decline. The Newmark analysts report that multifamily sales volume dropped 71.8% year over year. The causes include price dislocation between buyers and sellers and increasing interest rates.

Newmark analysts also note that multifamily origination volumes have declined since March 2022. “Activity recovered from an especially weak January-February 2023,” they said. “But has been range-bound since.”

Furthermore, in the face of current economic volatility, “$75 million and greater deals also have experienced the largest expansion in transaction cap rates,” the report said.

Lower Origination Volumes

Newmark reported that multifamily debt originations fell by 58% year over year in the first half of 2023. Quoting from RCA data, the Newmark analysts noted that these volumes were the lowest since 2014. Furthermore, they continue running consistently below pre-pandemic levels.

Meanwhile, the GSE share of multifamily finance grew sharply in 2023, trending well above bank, insurance and CMBS lending.

Other trends noted in the report include:

• An increase in dry powder at closed-end funds increased by 11% since the start of 2023. Analysts surmise that record fundraising by opportunistic funds during Q2 2023 is behind the increase “as investors gear up to take advantage of asset repricing.”

• Returns continue to be broadly negative, though increased on the margin. Low-rise and garden apartments continued to outperform high-rise properties.