Multifamily Investment Is In Economic Chaos, But Some Regions Are Bucking The Trends
Multifamily investors and landlords generally have been able to cash in from a national surge in apartment rental rates in recent years. For many, it was a time to make up for losses suffered during the pandemic when it became impossible, if not illegal, to evict nonpaying tenants because of local and national eviction moratoriums.
On the investor side, many rolled the dice and acquired and built properties at inflated prices, betting on a continued escalation of post-pandemic rent increases. But with rent growth slowing or even decreasing in some areas, investors who made creative financing decisions are now looking at balloon payments for floating-rate mortgages tied to interest rates they can no longer afford.
According to real estate analytics firm Green Street, building values have also dropped 20% since their peak. But looking at commercial real estate investment nationally only tells part of the story, as some regions of the country are still outperforming. In fact, you might get different results in the same state.
“We look at things predominantly state by state, and there are certain markets still supporting strong rent growth. There are also certain markets supporting strong rent growth, while in the same state, there are also noticeable declines,” Alan Lewis, co-founder and chief investment officer of San Diego-based investment platform DiversyFund, told Benzinga.
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But Lewis also stressed there are some vivid signs of distress across the board because of what investors paid for properties during the pandemic.
“What’s happening is certain sellers are starting to waive the white flag with some assets they overpaid for in 2020 and 2021 with floating rate bridge debt,” he said. “Now some of those sponsors that didn’t purchase rate caps are in a load of hurt and the floating rate is crushing them.”
Many people in the industry believe the multifamily sector will remain volatile for the foreseeable future, especially as demand wanes. Among them is Paul Smith, a senior vice president with Bellwether Enterprise (BWE) Mortgage in Columbus, Ohio, who told RE Journals, “I think there is going to be a wave of new supply over the next 12 to 18 months, and I do expect there to be some softening in the demand for multifamily in the short term, the next 12- to 24-month window ahead of us. But once we get through that wave of supply, the multifamily sector will still look strong. That underlying demand in all markets for housing is not going away.”
Lewis believes the appearance of a lack of affordable housing is a regional issue. “You still have a lot of markets with a supply deficit, even though there’s new product coming online. There is not a lot of building going on right now. There are national trends, but some very unique situations market-by-market,” he said. “We are laser-focused on a handful of select markets and have been looking at those with stronger than average recoveries as well as those with daily strong rent growth, including Florida, North and South Carolina, Washington and California, which is again market dependent.”
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