Light at the End of the Tunnel: A Review and Forecast of the Multifamily Market - 2023 to 2024

As we usher in 2024 at Offerd, we reflect on the multifamily market's journey through 2023 and peer into what the future holds.

2023: A Year of Significant New Supply amid Plummeting Values and Volume

The 800-pound gorilla in the room for 2023 was of course the Fed’s tightening interest rate environment designed to combat the runaway inflationary environment that resulted from the massive fiscal stimulus pumped into the economy during the Covid crisis. While most of the economy has weathered the rapid rise in rates fairly well given the robust employment picture this and other factors, combined to make 2023 a dismal environment for commercial real estate and multifamily was no exception.

The multifamily market in 2023 witnessed a substantial increase in housing supply within top markets across the nation. This surge led to decelerated rent growth in previously booming areas and, in some cases, even a decline. The Midwest and Northeast regions showed robust rent increases, while Sunbelt markets experienced a significant slowdown. Consequently, the national vacancy rate saw a slight uptick due to these supply influxes, particularly affecting Class A and Class B properties.

Transaction volumes took a steep dive to $119 billion, a staggering 61% decrease from the previous year, signaling a volatile investment climate. Despite this, our clients remained active, underwriting deals and making offers. However, a persistent gap between asking and bidding prices meant that only sellers under pressure could align their expectations with market realities. The public listing efforts generally missed their pricing targets, creating widespread unrest in the traditional brokerage sector. The week when the 10-year yield soared to 5% marked a challenging period that we hope remains unparalleled in our professional tenure.

The cornerstone of 2023's sales was motivation. Without it, sellers were reluctant to participate in the market. The more institutional the asset, the less likely it was to trade, as these groups had the capacity to revise business strategies, recapitalize if needed, or call for additional capital injections. There's a prevailing sentiment that the Federal Reserve will relax interest rates, leading to at least a partial recovery in asset values. We noted that Class A properties in prime markets, such as Dallas, were trading at capitalization rates exceeding 6%, a stark increase from the early 2022 rate of 3.5%. This rise from 3.5% to 6% cap rates symbolizes a 40% devaluation within just 18 months—an occurrence that would have caused mayhem reminiscent of the Great Depression had it happened in the stock market.

Forecast for 2024: Modest Growth Amidst Cautious Optimism

Looking ahead to 2024, the multifamily market is poised for moderate growth, albeit at a subdued pace compared to 2023. The current economic climate has slowed new construction starts, hinting at an impending market equilibrium and many pundits are suggesting rent growth picking up again in 2025. The Federal Reserve's signals toward easing interest rate policies in the latter half of the year have the market anticipating between five to six rate cuts by year's end, contingent on inflation reverting to the 2% target. This would be a welcome development for all classes of commercial real estate.

The Quest for Motivation

In 2024, as in the previous year, many sellers are expected to remain on the sidelines, waiting for interest rates to soften later in the year. In the interim, only the truly driven sellers are likely to engage at prevailing market rates. We're proactively pursuing several segments of motivated sellers in order to drive transaction volume for our clients:

a. Transactions completed between mid-2020 and mid-2022, particularly value-add deals, are prime targets. These deals, which were predicated on now-obsolete assumptions, are under strain. Rent growth has plateaued or declined; operating costs, notably insurance premiums, have surged; interest rates have spiked post rate cap expirations, and cap rate expansion has eroded asset values, complicating refinancing efforts.

b. Newly completed or nearly finished merchant-built deals are facing similar challenges. The widening of cap rates has severely impacted their stabilized values, making the transition from construction to permanent financing troublesome, often leading to assets reverting to lenders.

c. Smaller-scale deals, particularly those with fewer than 100 units (sometimes referred to as mom and pop are still transacting. Run akin to family businesses, these properties often change hands due to life events, offering opportunities for acquisition at reasonable bases. When Mom gets Alzheimer’s or Dad passes away timing the market for optimal pricing is rarely an option.

Navigating the Future with Offerd

At Offerd, our dedication to delivering cutting-edge insights and strategic advice remains unwavering. As we participate in the multifamily market's recovery, we are equipped to guide you through these evolving dynamics and help seize upcoming opportunities. Our best in class software and Marketplace solutions represent the innovative change the industry needs to chart a new course. Leveraging our platform, we identify assets with a high sale probability and deploy our seasoned brokers to connect with groups ready to transact in the current market.

Our Marketplace provides a commission-free avenue for asset sales (since our buyers cover the fees), coupled with real-time market pricing feedback. Should our Marketplace not yield desirable pricing, our listing team can conduct a comprehensive public marketing campaign, amplified by our proprietary technology to engage the most fitting buyers.

Our Capital Markets team offers comprehensive debt and equity solutions, and our student and affordable housing divisions specialize in these niche strategies.

Stay informed and at the forefront with Offerd's expert insights and analysis. Let's collectively navigate the multifamily market's challenges and prospects for 2024.