5 Multifamily Trends to Watch

The multifamily investment market over the past couple of years has been driven by institutional acquisitions bringing market sales volume up until the end of Q4 2022. From Q4 2021 until Q4 2022, BREITS and S-REITs generated sales activity of approximately $10 billion per quarter or $100 million daily. Money was inexpensive and inflation high, which is ideal for real estate investment. Last year, as we all know brought that volume to a halt. There have been a number of negative impacts that have left owners/landlords reevaluating asset pricing, debt disposition, and exit trade strategies. In addition to capital being more expensive, investors must consider and evaluate with improved metrics when identifying the right asset. Below are a few trends we have been seeing over recent months.

1. Financing woes

Because the capital markets are so expensive, many owners aren’t able to sell their properties and are also having challenges refinancing. Interest rates are upwards of 7 percent for apartment assets and bridge loans are hovering around 9 percent. There are many lenders that won’t finance a property unless an owner or an investor has 50 percent equity or capital to invest.  

If an owner has an IO loan coming due, and the 50 percent LTV is not there, they are forced to either cut a check for additional capital or raise money with other investors, which is challenging when the borrower is viewed as higher risk given the asset’s situation. These circumstances are also combined with the fact that rents are currently very slow to rise or are plateauing, resulting in asset devaluation.  

2. Buyers are not overpaying

Investors with the required equity to buy are not going to overpay for anything. If a deal doesn’t pencil, they will bypass an opportunity. Even patient investors who are looking for a long-term hold aren’t willing to sink more money into an asset that needs to be updated or has deferred maintenance. The sellers that are accepting offers that were below their expectations are those that have to exit.

3. Moving equity out of state to the Midwest

The trend for the past several years has been owners trading out of properties in states that are not landlord-friendly such as California and New York to states such as Arizona, Florida, and Texas. As pricing has been peaking in those markets, I am now seeing trades into growing markets in the Midwest, including Arkansas and Oklahoma. Many sellers are family offices and individual investors who have owned their assets for decades and are looking for bigger cap rates and less regulation.

4. Maximizing NOI

With rents stagnated in many markets, owners are looking to maximize their NOI in order to cut down on operations costs. This includes looking at efficiency in utilities which, for example, could be converting from one water heater for all a property’s units to individual heaters, planting drought tolerant vegetation, and reducing electricity costs with LED lighting, among other strategies. That may also mean offering an incentive to new renters to maximize occupancy for the long-term, charging for parking and additional storage fees, and adding an ADU to the property for additional income.

5. Investors are avoiding landlord unfriendly markets

I have a client that owns more than 2,500 units in assets in Los Angeles County. Many of these are in South Pasadena. This city has recently followed suit with many other LA cities on stringent rent control restrictions limiting rent increases to no more than 3 percent per year. This is a huge problem if your cash flow is already tight because of a higher vacancy as well as utilities, maintenance, insurance, materials, property management costs, and a myriad of other expenses that are rising at unsustainable rates. Investors seeing the growing roster of rent control and other renter protection legislation in the pipeline, simply steer clear of these areas. Who can blame them?

Recommendations for multifamily investors

We are advising our apartment clients to home in on what their investment goals are and how long they span. As I mentioned, at least 50 percent equity is key if someone is looking to finance or refinance an asset. It is important for them to prioritize goals for what they want—sometimes that changes what they are going to buy. The good thing is there are a diversity of options for investors. This could include simply holding onto an asset until a better time, buying a limited security product like a DST, rolling into a small investor group that is seeking retail property, or doing a 1031 exchange into a cash-flowing asset out of state. It isn’t all bad out there, but smart investors have to think strategically based on their specific situation.

Jason DuFault is regional managing director, Southern California, KW Commercial out of the Long Beach office.