5 Factors to Consider for Multifamily Investment

The multifamily investment landscape has experienced significant shifts in the last year with higher interest rates, challenges in securing debt for new developments, and softening fundamentals across asset classes. Despite these obstacles, CBRE’s 2024 Global Multifamily Investor Intentions Survey recently revealed upbeat investor sentiment, as multifamily remains the top acquisition target. Fogelman, like many others, has adapted new financial strategies amid this shift, remaining strategic and prudent in its approach toward new investments. Here are five considerations for the multifamily investment landscape moving forward:

1. New Realities of the Market

The current economic landscape has impacted the attractiveness of multifamily investment. Compared with 2022 peak levels, asset prices have declined by 20% to 30%, while the cash flow profile remains as challenging as it did two years ago. As a result, many investors, including Fogelman, have remained conservative despite the more attractive price per unit for new acquisitions over the past 18 months. New CBRE research suggests that fundamentals remain challenged with near-record high supply levels in most markets. However, improvements are expected in 2025 amid slowing completions and a resilient macro-economy.

2. Resilient Macro-Economy Despite CRE Recession

Economic data points to a soft landing, rather than a recession for the broader economy. However, interest-rate-sensitive sectors, such as commercial real estate, face conditions similar to a traditional downturn. Key inflation measures are trending down, but at a slower pace than expected, delaying potential rate cuts from the Federal Reserve. On the positive side, some existing headwinds, such as increased property insurance rates, have eased, with insurance markets showing signs of improvement. The overall economy is faring better than during the Global Financial Crisis, and the multifamily sector is experiencing a more stable environment compared to the tumultuous conditions of 2008. Larger management players, including Fogelman, have become uniquely positioned to navigate the new market realities. Leveraging tangible and reliable real-time data from managing extensive portfolios allows anticipation of future trends and adaptation to evolving market conditions.

3. Top Risk-Adjusted Opportunities: Outlook for Midwest and Sun Belt Markets

Migration patterns have moderated since the mass movement immediately following COVID, but the overall shift from high-cost urban centers on the East and West coasts continues. According to CBRE, despite softening fundamentals from a glut of new supply, Sun Belt markets remain highly attractive for investment. Additionally, Midwest markets show strength, with positive year-over-year rent growth of 2.7%. Metropolitan statistical areas that previously ranked in the bottom quartile for rent growth over the past decade are now in the top quartile, primarily due to lower levels of new construction. “Steady Eddy” markets such as Kansas City, Missouri, and Louisville, Kentucky, are outperforming growth markets such as Atlanta, Nashville, and Dallas, despite migration patterns favoring the Sun Belt.

4. Transaction Activity: Exceptionally Low but Should Ramp Up Significantly

The past 18 months have seen low transaction volumes compared to historical standards, but positive changes are expected in late 2024 or early 2025. Apartment fundamentals are expected to strengthen as supply gets absorbed, supporting buyers' willingness to transact at negative leverage with accelerated revenue growth. If interest rates hover around 5%, cap rates may compress into the mid- to high 4% range, leading to increased sale activity. Blackstone’s recent $10 billion multifamily investment is a positive signal for the market, indicating a potential return of large portfolio transactions.

5. Staying Ahead in a Slower Market

In a slower market with limited investment opportunities, multifamily investors can stay ahead by leveraging third-party research and internal data. Real-time trends and insights from managing large portfolios can provide a competitive advantage and help make informed decisions despite the scarcity of available opportunities. Additionally, focusing on safety and security can further enhance investment attractiveness. Partnering with companies like Overwatch Technology, which specializes in advanced security solutions, can help multifamily properties enhance safety, reduce risks, and potentially lower insurance costs. By prioritizing protection and leveraging cutting-edge technology, investors can create a more appealing and secure environment for tenants and stakeholders.