Finding Gems in the Multifamily Investment Market
While the buying pace is slowing as the multifamily market tries to determine where cap rates are headed, investors are prepared to move forward for the right deal.
I bought my house at the top of the market. That was 20 years ago, when prices were high but interest rates were low, and single-family homes were selling almost as soon as they were listed. I really wanted a split-level ranch, but they were so popular that above-asking offers were accepted before I even got to my appointment—repeatedly. Finally, I broadened my search and found a charming colonial being overlooked by the split set—and bought it at a discount from the divorcing couple eager to sell.
It’s a much different climate for home sales right now. It slowed in April, in the face of current economic uncertainty and questions about how that’ll impact interest rates. (Interestingly, those rates are actually similar to what they were 20 years ago, but after a decade or so of unprecedented lows, they now feel quite high.)
The multifamily investment market isn’t the single-family market, but after its pace picked up earlier this year despite a still-wide bid-ask spread, it’s also slowed more recently, as buyers and sellers alike try to determine where cap rates are headed. “You put a deal on your contract, and 60 days later, Treasuries are 75 basis points different. That kind of thing makes deals challenging,” Tyler Chesser, co-founder & managing partner of CF Capital, told writer Dees Stribling for our feature story “Multifamily Investors: Buying Time?“
In fact, cap rate volatility is a much bigger concern than broader economic uncertainty, especially since resident demand continues to grow—with unprecedented single-family home prices one factor contributing to a multifamily demand that recently surpassed supply.
Rising operational expenses also represent a concern for owners and investors, impacting who can buy where, as the ability to capitalize on portfolio efficiencies has become more critical, the panelists for the MHN Voices Midyear Investment Outlook observed while planning for the May 29 webinar. Costs ranging from insurance to employment, maintenance to administration and marketing are making it tougher for smaller owners to compete.
And the limited available inventory is further curtailed as owners needing to transact are starting to gain greater flexibility by locking down three- to five-year bridge loans that allow them to push off property sales, the panelists observed.
There are plenty of challenges to deter today’s buyers. But Chesser views the investment climate as favorable enough for deal flow to continue, even if at a slower and more selective pace than earlier in the year. There’s certainly a lot of capital piled up along the sidelines, with a need and a determination to find opportunities. I was able to unearth my little gem during the heady days following the dot-com bust; more active and strategic buyers today will identify their own jewels.
