Is Multifamily Nearing a Turning Point?

Michael Zaremski

While the multihousing investment market remains very challenging due to increased scrutiny, rising interest rates and uncertain future economic conditions, deals are still getting done, albeit not nearly at the pace experienced in the post-pandemic boom. 

Investment sales are noticeably down this year compared to 2022 and have been much more difficult to close as everything is getting looked at with a fine-toothed comb, causing those sellers who can afford to wait to hold off. As a result, much of what has been transacting this year involved sellers with looming maturities who were willing to take less desirable interest rates to effectuate a transaction.

Between January and June of 2023, just $57.0 billion in multihousing transactions occurred, compared to $161.8 billion during the same period of 2022.

The cost of financing is also hampering new construction and slowing activity at a time when the market is short on supply. 

Private capital is dominating the market currently, seeking those properties with the highest quality available across all asset classes and in the sub-$50 million range.  Conversely, the majority of institutional capital continues to be on the sidelines.

After taking backseat to Sun Belt metros throughout the pandemic, larger traditional markets relatively outperformed other markets through the summer. Gateways took six of the top 10 positions for multihousing investment through mid-2023, compared to only three of 10 spots in 2022.  

In terms of maturities, JLL research indicates that there is $940 billion of multihousing debt maturing between 2023 and 2027, with $344 billion held at banks. Of that debt, some $176 billion is securitized on some form with 47 percent, or $82 billion, maturing in 2023 and 2024. Markets with the greatest exposure include San Francisco (53 percent exposed), Washington, D.C./Virginia (31 percent exposed), and New York/New Jersey (30 percent exposed).

Currently, investment activity will continue to be challenged in large deals that are not driven by a debt trigger. Lenders will continue to be focused on the more distressed portions of their real estate portfolios and are working very well with multihousing owners to restructure debt agreements as necessary to “kick the can down the road.”

Poised for a rebound

While economic conditions may continue to thwart investment activity in the coming months, the saving grace for the industry is that government agencies, including Fannie Mae, Freddie Mac and HUD, always have capital to provide liquidity.

Additionally, borrowers that have to refinance their lower-rate, short-term debt will look to obtain gap equity solutions.

Further, the bid-ask ratio is beginning to close as both buyers and sellers become more realistic with value. This should translate into increased transaction volume from both private and institutional investors and bring much of the $82 billion of maturing loan debt to the investment sales market in the next 12 to 18 months.

While the bottom of any market is difficult, if not impossible, to predict, the multihousing sector appears to be near or have reached that level and is poised for a rebound.

Michael Zaremski is managing director, JLL Capital Markets.