Analysis: Multifamily is Doing Fine
Recent reports about the multifamily sector indicate slowing rent growth and a slight downward trend in occupancy. Also concerning has been what multifamily investor CP Capital dubbed “the disruption and ambiguity caused by stubbornly high inflation, and the Federal Reserve’s ongoing strategic rate hikes . . .”
But CP Capital’s advice is to not worry about multifamily. According to the company’s January 2023 report, the sector “remains strong due to ample dry powder, a structural supply-demand imbalance, and favorable employment, income, and demographic trends.”
One reason not to push the panic button is because the monster double-digit rent growth stats experienced in 2021 and much of 2022 were simply not sustainable. “Following in the footsteps of those unsustainable heights was always going to be a daunting task, especially as investors and renters alike grew comfortable in an ultra-low interest rate environment . . .” according to the CP Capital report.
In fact in the face of increasing interest rates and other factors, the institutional multifamily developers and owners are hitting the pause button on investment and building until things settle a bit. What’s being experienced now is the “seasonality” of multifamily, which was an acceptable slowdown in the days prior to the pandemic.
But what about transactions? The CP Capital report noted that decreased valuations and increased cap rates should be “taken with a grain of salt, due to the unique nature of most recent sales.” This is because rents and NOIs remain strong. Furthermore, sales pricing should improve once buyers return to the market. CP Capital believes this will happen in the second half of 2023. At that point, it’s likely that the Federal Reserve could stop boosting the effective federal funds rate.
Additionally, CP Capital indicated that multifamily was “an investment darling” over the past decade for very good reasons. These include supply-demand fundamentals, demographic trends and continued increasing costs of homeownership. Another strength of the sector is the amount of capital that remains on the sidelines. This capital will be deployed once things settle down, the CP Capital report said.