In 2024, the multifamily sector may be a mix of 2019 and 2023.
“This year could look a lot like 2023 depending on what happens in the economy,” according to Sam Tenenbaum, head of multifamily insights for Cushman & Wakefield. “We’re looking at job growth and interest rates, and of course the big boogeyman over the past 24 months: inflation.”
The labor market has been remarkably resilient for the most part, Tenenbaum said.
While inflation rates have come down, they haven’t reached the 2% rate that the Fed identifies as ideal. But with the 10-Year Treasury hovering closer to 4% than to 5%, lending costs are more attractive now than they were in the latter half of 2023.
A key metric to watch for multifamily investors is rent growth.
“If we pull off a soft landing as many economists hope, and the Fed cuts rates, then we’ll likely have positive rent growth in 2024, especially because demand is still strong,” Tenenbaum said. “If we get a recession, we could get more downward pressure on rent.”
Rent growth for 2023 was 1.6%, which is below pre-pandemic levels, but brings the market closer in line to the pre-pandemic trendline.
“While capital markets are still dislocated, debt costs have come down from recent peaks, so we expect more properties to trade this year,” Tenenbaum said. “We feel optimistic about the velocity of transactions in 2024, in part because the peak for multifamily loan originations was 2021 for both purchases and refinancing. More than 50% of loans that year were floating rate debt with the bulk of maturities about three years from the origination date.”
Interest rates are more than double in 2024 than they were in 2021, so borrowers must either refinance, which may require an infusion of capital, or sell the property.
“This should induce more price discovery and agreement between buyers and sellers,” Tenenbaum said.
More clarity on price may encourage more multifamily transactions in the coming year.
While some investors and developers hope for rate cuts from the Fed, especially if a recession occurs, Tenenbaum warns that even if base rates come down, typically the spread tends to widen.
“Some borrowers may choose floating rate debt to take advantage of the hoped-for falling rates,” Tenenbaum said. “There are lots of strategies from a capital markets perspective about how to approach this market. Borrowers need to recognize that the capital market challenges take time to work through.”
Supply and Demand Dynamics
In 2023, about 260,000 units were absorbed, which is in line with pre-pandemic 2017 through 2019 annual demand activity.
“The challenge is that 440,000 units were delivered in 2023,” Tenenbaum said. “But construction levels are already down 14% from the peak during the first quarter of 2023.”
While 2024 may still be a little tough, since 800,000 units are in the pipeline, Tenenbaum points out that multifamily starts are down to levels not seen since 2012.
“That improves the outlook for 2025 to 2026 and beyond,” Tenenbaum said. “But what’s ultimately more important is that monitoring supply needs to be done on a regional level and even a micro-market level rather than looking at national numbers.”
Fortunately, many of the markets that have high supply also have high demand.
“The markets where we saw the most deliveries in 2023 were also the markets that have seen the most demand over the past year,” he said.
The top three markets with the most deliveries – collectively about 75,000 units – were Dallas, Houston and Austin. Among the 90 markets that Cushman & Wakefield follows, Dallas ranked third, Houston fourth and Austin seventh for demand.
“Markets with high levels of supply and demand sometimes have more volatility in any given year,” Tenenbaum said. “It takes time to lease up a building and you don’t want it 95% leased in the same month so you can manage lease expiration risk. Plus, it’s operationally challenging to have 300 people moving in during the same month.”
In 2023, the Northeast and the Midwest multifamily markets outperformed other regions. Tenenbaum anticipates that pattern to continue because of the minimal supply pipeline in those areas.
“The Sunbelt has seen the bulk of population growth over the past 20 years and that’s likely to continue because it’s still attractive to people and relatively more affordable,” Tenenbaum says. “These markets are where more than half of supply is in the pipeline, which will put pressure on fundamentals in the short term.
Key Factors to Watch
Single-family home affordability typically aligns with the rental market, but in the past two years the affordability gap between homeownership and renting widened.
“In 2023, we saw an erosion of 34% of people’s buying power compared to 2021 because of mortgage rates and prices,” Tenenbaum said. “Home sales were extremely low in 2023, which means there’s pent-up demand. If mortgage rates drop in 2024, that could mean more renters opt for homeownership, which would reduce demand for rental housing.”
However, home prices remain elevated, and inventory is still low, which could hold back a surge of renters from becoming homeowners.
Another factor to watch that could impact the multifamily sector is the potential for loan delinquencies.
“So far we’ve seen fairly minimal loan delinquencies, but with the degree and pricing of originations at the height of the market, we could see a little more delinquency in the coming year,” Tenenbaum said.
However, the availability of capital is likely to offset any potential uptick in delinquencies.
“Funds have raised more than $100 billion in equity for deployment in the multifamily sector, which is two times more than the funds ready to deploy in any other property sector,” Tenenbaum said. “There’s also an abundance of capital looking to solve problems – whether in the form of mezzanine loans or preferred equity, or to acquire property outright.”