Multifamily Retains Appeal Despite Some Bumpiness

The U.S. multifamily sector remains a preferred commercial real estate investment. Rental demand continues to outweigh supply in many major markets as construction activity has been constrained due to rising costs, interest rates and regulatory issues that slow development.

While top U.S. markets have seen the multifamily inventory increase by an annual average of 3.4 percent since 2020, we see development activity peaking this year, with almost 500,000 new units expected to be delivered. Absorption reached its highest level in Q1 2024 since 2021, when demand last peaked.

At the same time, we are seeing a cooling off of rental rates after their rapid escalation from 2020 through 2022 as the market corrects for inflation and rising overall consumer costs. Per Avison Young’s U.S. Q1 Multifamily Report, over the last 12 months, just 36 percent of for-rent product has increased rents by more than 1 percent and 48 percent of the top U.S. markets saw effective rents decline over the last 12 months.

The period of price discovery and imbalance between buyers and sellers appears to be coming to an end as the average cap rate continues to hover at 5.2 percent. Sales volumes had dropped to their lowest levels since Q2 2020. The higher cost of financing has taken the lead in driving market pricing down for both existing multifamily properties and development sites.

Smoother days ahead

Looking forward in the near term, the market remains bumpy for owners. We will see foreclosures on properties that are overleveraged as some owners are unable or unwilling to infuse additional capital into their asset to secure new financing. However, this will have a minimal impact on valuation and cap rates in metropolitan areas as there is still a dearth of available product on a national basis despite efforts to encourage new development.

We estimate that there is approximately 35 percent of fresh capital that is targeting multifamily assets, which is the most for any asset class currently. There has been a renewed interest by institutional investors after several quarters of waiting on the sidelines. This is a promising signal that many believe we may not see further declines in pricing which was a concern in previous quarters.

The most recent example of renewed investor interest is the news that Blackstone will invest $10 billion by acquiring and privatizing the AIR Communities REITs, its largest transaction in the multifamily market to date. AIR’s 76 rental properties are largely within coastal markets, including Miami, Los Angeles, and Boston, with Blackstone planning to invest another $400 million in improvements.

To conclude, we see a bright future for U.S. multifamily investment, one that will offer owners steady rent growth, asset appreciation, and most of all, higher renter demand across all income levels for years to come.

Peter Sherman is principal & head of U.S. Multifamily Capital Markets, Avison Young.