Why Multifamily’s Glass Is More Than Half Full

As we move into the summer, the current capital markets environment appears to be impacting the prospect of a material recovery in CRE investment. Multi-housing, like other CRE asset classes, is facing similar headwinds from these trends, albeit to a lesser degree for several structural reasons that are worth delving into to figure out where sentiment heads as we move further into the year.

Many market participants are looking to deploy capital into multi-housing investments but cannot find opportunities that meet minimum required return thresholds, regardless of strategy. Many of these same participants are also in asset management mode, especially if they purchased CRE assets prior to the run-up in interest rates with floating-rate loan exposure and/or have exposure to other CRE asset classes.

Overall, most investors appear to have settled into the fact that interest rates are going to be higher for longer and that uncertainty will remain as we move forward regardless of the outcome of the upcoming election and what it means for the economy. The key to unlocking transaction activity appears to be simply just stability in rates, not a decrease, which we seem to be inching toward. This should be considered a net positive and, in an effort to be glass half full, let’s build on this momentum with a few other trends that should be considered a net positive for multi-housing capital markets as we move forward in 2024 and beyond.

Liquidity: Meaningful liquidity exists for multi-housing sector across the capital stack. Investment shops that have historically been focused on development have shifted to alternative investments in the residential sector (i.e. acquisitions, credit, build-to-rent, seniors, student, etc.) to deploy capital. This is a net positive as we move forward as most of this investment is still in the residential sector, which helps to underpin available liquidity in the space.

Supply/Demand: The current capital markets backdrop is not conducive to new construction or affording a home for most first-time home buyers. This has led to a structural supply/demand imbalance that will only continue to get worse should rates remain elevated. The fear amongst market participants is supply-related, but this risk abates as we move forward given that new construction starts are extremely muted given how tough it is to make new construction numbers work. Investors that can navigate the uncertainty over the next couple of years will be well positioned to capitalize on this.

M&A: Acquisition activity has started to pick back up. A large private equity owner who was pulling one-off acquisitions off the market in the 2H23 because they thought the market was going to improve is under contract to purchase a large publicly traded REIT and take them private, signaling market optimism from the institutional side. Lenders also appear to be done kicking the can down the road on existing portfolio loans. This means different things for different lenders (i.e., banks vs. debt funds, client relationship, collateral, etc.), but the difference between multi-housing and other CRE asset classes is the aforementioned liquidity that exists in the multi-housing space should there be any distress.

With these “green shoots,” the multi-housing space is well positioned to weather any near-term issues to get to a better place. The fundamentals of multi-housing will serve it well as we move forward into 2024, we just need to keep the positive momentum going.

Amit Kakar, Senior Director, JLL Capital Markets.