During the first part of 2023, the multifamily real estate market experienced sluggish, albeit positive, demand. While many industry watchdogs remain cautiously optimistic through such uncertain economic times, a few trends stand out.
Much of what we have seen in the past eight months can be attributed to a more challenging lending market, a noticeable disparity in supply and demand, and investors having to come to terms with heightened expectations for improved returns.
In the long run, multifamily investing will find smoother sailing once the dust settles and the market recalibrates. Multifamily syndications are a sound alternative to doing it alone, as they grant you access to industry insiders with vast experience navigating these choppy waters.
Decrease in Multifamily Deals Attributed to Cautious Lending Market
According to Multifamily Dive, commercial loans have tightened, dropping from 58% in Q4 2022 to 41.1% in Q1 2023; however, banks still led the way. Approximately one-third of these loans went to new construction.
This tightening down by banks is being felt by developers who find it increasingly difficult to secure construction loans. That is because banks have become more selective in who they want to loan to, favoring those with established relationships and who are willing to put equity in.
Due to rate hikes and market uncertainty, there has also been a slight increase in multifamily loan-to-value ratios. LTVs for multifamily bumped up to 60.9% from 59.5% in Q4 2022. However, they were still lower than the previous year.
Some other factors adding pressure to lending activity include the following:
- Increased borrowing costs
- Credit tightening
- Volatility in the market
- Higher interest rates
- Lack of certainty around property values
Despite the lack of certainty now, more clarity will come over time as maturing loans shed more light on the state of the market.
Heightened Investor Expectations for Improved Returns
The boom we experienced in 2021 and early 2022 set unrealistic expectations for some investors coming into 2023. While the pandemic led to a sharp increase in net operating income due to rising rental demand, the momentum couldn’t last forever.
Right now, we are experiencing a slight decline in net operating income growth that should steady itself in the coming year before increasing again in the long term.
.While conservative investors want to avoid investing in a volatile market, history has repeatedly shown that long-term gains outweigh current hardships. This is where it becomes apparent that investors must do their due diligence in vetting the best investment firms to work with.
For many new or conservative investors, multifamily syndications are a great entry into real estate investing because they can partner with experts who facilitate the project. In contrast, investors take on the far less challenging role of passive partner.
Demand-Supply Disparity in Multifamily Real Estate
Rental demand has softened over the first part of 2023, which means below-average estimated rent growth, one percent to be exact. While this may not seem like the best news, it is not the case in every city. According to Fannie Mae, metro areas like Boston, San Diego, and Midland-Odessa have seen rent growth exceed two percent. Respectively, cities with an excessive amount of new supply anticipated over the next year could see a decline in rent growth.
While Fannie Mae estimates that multifamily originations will continue to trend lower through 2023 ($310 billion – $350 billion), they paint a better picture for 2024 ($410 billion – $450 billion).
Is Investing in Multifamily a Good Idea?
Yes. Investing in long-term assets that diversify your portfolio is a good idea. Where people tend to make poor choices is with whom they choose to entrust their investment.
Your power lies in understanding what is currently happening in the market so you can make informed decisions. While the news hasn’t been enticing over the past year, that doesn’t mean not investing is the optimal choice for your financial future.
Multifamily syndications are a great way to break into multifamily real estate without feeling like your head is on the chopping block. As a passive investor, you have the freedom to continue your daily life while the experts handle the heavy lifting, leaving you to enjoy your return over time.
Want to learn more about multifamily investment opportunities with Gimme Shelter?
Reach out today, and we’d be happy to answer your questions!