Navigating the Shifting Landscape of Multifamily Investments
With economic conditions moderating and the multifamily market facing both opportunities and challenges, investors need to adopt a strategic approach to navigate the evolving landscape. This article provides a comprehensive analysis of the near-term multifamily market outlook, offering key insights and actionable strategies for sophisticated investors.
Key Takeaways:
- Economic moderation is expected to influence multifamily market dynamics.
- Rent growth is projected to be positive but below historical averages.
- An influx of new supply may lead to higher vacancy rates in certain markets.
- Regional variations will play a significant role in market performance.
- Strategic investment and adaptive reuse are key themes for 2024.
Economic Conditions and Their Impact on Multifamily Investments
In 2024, the broader economic landscape is characterized by a sense of cautious optimism. The economy appears to be heading for a “soft landing” after a period of turbulence. According to Freddie Mac, “economic conditions appear to be moderating, and expectations are for the multifamily market to see positive but weaker growth in the year ahead.” This moderation is expected to shape multifamily market dynamics, influencing factors such as rent growth, vacancy rates, and property values.
Rent Growth and Vacancy Rates
Projected rent growth for 2024 is expected to be positive but below the long-term average. Freddie Mac forecasts rent growth of 2.5% for the year, slightly below the historical norm of 2.9%. Similarly, vacancy rates are expected to rise slightly, reaching 5.7%, compared to the long-term average of 5.3%. This stability in vacancy rates, despite peak property deliveries, suggests that consistent demand for multifamily units will help maintain equilibrium.
“We expect rent growth to be in the range of just 1.0% to 1.5% in 2024,” notes Fannie Mae. “The national multifamily vacancy rate is expected to rise to 6.25% this year, as more than one million multifamily rental units are underway.”
Regional Variations
The impact of these trends is not uniform across the United States. Regional variations play a significant role in determining how market dynamics affect different areas. The Sunbelt and Mountain West regions, for instance, have witnessed a substantial influx of new housing units, representing approximately 3% to 4% of their current inventory. In contrast, the Northeast and Midwest regions have seen lower ratios of new inventory, typically ranging between 1.1% and 1.5%.
“The Sunbelt and Mountain West regions are expected to bear the brunt of new supply, which will exert pressure on rent growth,” says Freddie Mac. “Conversely, markets with lower supply levels or strong demand drivers continue to perform relatively well.”
Supply and Demand Dynamics
The multifamily market is expected to face a significant influx of new supply in 2024. Over 500,000 new units were completed in 2023, and an additional 736,000 units are slated for completion in 2024. This surge in new supply is likely to put upward pressure on vacancy rates and downward pressure on rent growth in oversupplied markets.
“We believe that the amount of new supply completing over the next 12 months will push the national vacancy rate up to 6.25%,” explains Fannie Mae. “It is important to note that this elevated level is expected to be short-lived and is expected to drop back down to 6.0% by 2025.”
Adaptive Reuse and Sustainable Development
In response to the challenges posed by new supply, adaptive reuse and sustainable development are emerging as key themes in the multifamily market. Adaptive reuse involves repurposing existing structures, such as old warehouses, factories, and office buildings, into multifamily housing. This approach not only addresses the demand for housing but also promotes sustainability by reducing the need for new construction.
“Sustainability consciousness, along with cost issues, will foster continued growth of adaptive reuse as a prevalent design and construction movement in multifamily,” notes Eric Greenfield, real estate division chair at Polsinelli Law Firm via Multi-Housing News.
Strategic Investment Opportunities
Given the complexities of the 2024 multifamily market, strategic investment is crucial for maximizing returns. Investors should focus on regions with strong demand drivers, such as job growth and population increases, and be cautious in markets with high levels of new supply. Additionally, investing in properties below replacement cost and targeting assets with potential for adaptive reuse can provide significant returns.
“The emphasis among investors in the new year will be on buying below replacement cost,” says Roberto Casas, senior managing director at JLL Capital Markets. “Nationally, core assets in favorable locations are being priced 25 to 35 percent below replacement costs.”
Financing Challenges
Financing multifamily projects may pose challenges in the current environment, particularly due to high interest rates and economic uncertainty. Investors need to be selective in choosing buyers with discretionary equity and a track record of successful transactions. Off-market or quietly marketed sales processes can help target the best buyers and ensure execution.
“Given that raising equity is more difficult in the current environment, it’s more vital than ever for multifamily property sellers to select buyers with discretionary equity and a track record of making it to the closing table,” advises Dan Price, senior vice president of MLG Capital.
Conclusion: Strategic Navigation in 2024
As we move through 2024, the multifamily market presents both opportunities and challenges. Investors need to adopt a strategic approach, focusing on regional variations, adaptive reuse, and sustainable development. By understanding market dynamics and making informed decisions, savvy investors can navigate the complexities of the multifamily market and achieve successful outcomes.