Volatility may be the most common word to describe pretty much everything about the domestic and global economy over the past three years. The level of economic anxiety during these years has been exacerbated by the difficulty in predicting what was coming around the corner. But throughout this period, the multifamily sector has offered the most compelling risk-reward scenario, says Sam Tenenbaum, Head of Multifamily Insights at Cushman & Wakefield.
“Multifamily is the only needs-based asset class,” Tenenbaum says. “If you look at the hierarchy of needs, shelter is very high up there. Multifamily, which functions as the housing of last resort for many people, tends to be the quickest to rebound during recessions and a better performer through economic volatility.”
Overall, multifamily has performed well so far in 2023, with stable rents and occupancy rates. Rents continue to grow at more normal levels than in the past couple of years, performing closer to pre-pandemic levels.
At Greystone, application requests for a mix of acquisitions and refinances are up 2x compared to the fourth quarter of 2022, and April’s volume was up 30% year-over-year. Year-to-date applications went above $8 billion in April.
Debt Maturity Outlook
While some investors opt to sell now if they’re facing debt maturity in a higher-rate environment, the majority of debt maturity events are anticipated to occur in 2024, Tenenbaum says.
“The real concern is with floating rate debt, most of which was taken out in 2021,” Tenenbaum says. “Typically, that debt is for a three-year term, although there are often options for a one or two-year extension.”
Greystone has seen an uptick over the last year of applications to convert floating-rate debt to fixed-rate debt.
“A lot of investors have been trying to kick the can down the road and hope that maybe The Fed will come to the rescue with rate cuts before the end of the year,” Tenenbaum says. “The other alternative is that the market comes to the rescue, whether that’s a function of private debt – either mezz capital or preferred equity – or that interest rates come down because of a recession and then it costs less to refinance.”
The cost of rate caps rose rapidly in 2022 along with higher interest rates and rate volatility, Tenenbaum says.
“Rate cap costs have come down recently because the outlook for interest rates is less volatile than in the summer of 2022,” he says.
Risks for Multifamily
Despite the strong outlook for demand and mitigating factors that reduce the threat of oversupply, the multifamily sector isn’t immune to the same risks as other property types.
“Rising interest rates and inflation are related and both are a concern,” Tenenbaum says. “I think we’ll see some improvement in headline inflation in the second half of this year. The question will be how we get from here to the Fed’s 2% target and whether that requires the Fed to continue pushing rates, which could exacerbate the risk of recession.”
The message from The Fed appears to be that they will pause on raising rates, Tenenbaum says, unless inflation ticks up again.
“A bigger concern is a recession,” Tenenbaum says. “Even though apartments are recession resistant, they’re not recession-proof. If a recession is deep enough to impact demand, particularly with supply coming on, it could hurt the multifamily market.”
Still, Tenenbaum expects most markets to be resilient to a potential recession.
Markets for Investors to Consider
Growth in multifamily demand in Sunbelt markets in the Southeast and Texas is well-documented, but the Midwest region is beginning to garner more attention, Tenenbaum says.
“A lot of markets in the Midwest weren’t among the top performers during the boom period of 2021,” Tenenbaum says. “Rents stayed affordable and now they’re catching up. The Midwest has a relatively limited construction pipeline, so there’s room for growth. Also, they face the same housing shortages as other places in the U.S.”
Agency Loans Regain Market Share
Financing is anticipated to shift away from smaller banks toward Agency loans (Fannie Mae & Freddie Mac) as the year progresses.
For the past decade, about 20% of financing for multifamily transactions has been provided by small and regional banks, Tenenbaum says.
“That ticked up to about 25% over the last two years because the Agencies hit their caps and couldn’t lend anymore,” he says. “This year, the Agencies have room to regain market share.”
The pullback in lending from small and regional banks as they regroup from the banking crisis that began in the spring of 2023 should not be cause for significant concern for liquidity in the multifamily sector. Typically, government agency loans represented about 58% of total multifamily loan originations. That share dropped to about 40% to 45% over the past two years, but the Agencies share of loans has already risen to 55%, up 10% year-to-date for 2023.
Greystone has received a significant uptick in Agency loan requests over the past two months, the highest level of activity since 2021.
