With offices in Chicago, Milwaukee and the Minneapolis suburb of Eden Prairie, Midloch Investment Partners understands the multifamily market across the Midwest. And what do Midloch investment pros expect to see in this sector throughout the rest of 2024? A better year for investment sales and another strong year for leasing demand.
We spoke with Tim Donovan, managing director of Midloch Investment Partners, about the resilience of this sector and why he expects to see more multifamily sales in his favored Midwest markets this year.
Here is what he had to say.
A jump in sales activity
Donovan says that once the Federal Reserve Board late last year indicated that it was done increasing its benchmark interest rate, it immediately boosted the odds that the multifamily sector would see increased sales activity in 2024.
Tim Donovan, managing director of Midloch Investment Partners. (Photo courtesy of Midloch Investment Partners.)
Donovan said that an environment of stable interest rates should inspire more investors to purchase multifamily assets this year. But as far as interest-rate cuts go? Donovan said that he’s not entirely certain that the Fed will deliver as many cuts as some in the commercial real estate industry expect.
“The sentiment is that 2024 will be a better year with increased transaction activity compared to 2023,” Donovan said. “Of course, we are starting with a bit of a low point with 2023. A lot of people are expecting multiple interest-rate cuts this year, maybe as early as late spring. We are more cautious and not overly optimistic that we’ll see cuts. But we do think the fact that rates won’t be going up will result in more multifamily sales.”
There’s another important factor in play, too, the high number of multifamily loans maturing in 2024. Donovan said that roughly 20% of outstanding commercial real estate mortgages are set to mature this year, a number that’s so high partly because lenders granted so many extensions in 2023.
As Donovan says, nearly $930 billion of commercial real estate mortgages are set to mature this year, many of them originated in a very different interest-rate environment.
“In prior years, you could see neutral or cash-out refinances,” Donovan said. “In this environment, borrowers often need to bring additional capital to the transaction to close a refinance. Others are being forced to sell properties sooner than they anticipated for prices lower than they were originally hoping to sell at.”
A shrinking gulf between buyers and sellers?
One reason for such a shortage of multifamily sales last year? Buyers and sellers often didn’t agree on the appropriate prices for apartment properties.
Has the gap between buyers and sellers closed yet? Partly, Donovan says.
“For people who are not stuck between a rock and a hard place or people who are voluntary sellers, I would tell you that the gap has shrunk in the first few weeks of this year,” Donovan said. “We ae starting see that buyer demand has picked up again to the point where some are willing to pay higher prices for multifamily properties. But at the same time, sellers’ expectations have begun to step up a little bit more, too, so we’ll have to see if that gap between buyers and sellers starts to widen again.”
Solid leasing activity
Demand for apartment units from renters remained high in 2023. This was partly because higher mortgage interest rates made it more difficult for potential homebuyers to afford a mortgage loan.
These potential buyers, then, chose to rent an apartment instead of purchasing a single-family home.
But what about in 2024? Will leasing activity remain high in the multifamily sector?
Donovan said it will, especially in certain markets. Donovan said that he has seen a slowdown in leasing activity in certain overbuilt Sunbelt markets. But demand for apartment space from renters remains consistently strong in the Midwest, he said.
“Certain Sunbelt markets are struggling with excess amounts of supply,” Donovan said. “Some Midwest markets, though, have seen a more fixed stream of new units. A lot of markets in the Midwest have a healthier balance of supply and demand. That helps keep occupancy and rents more stable.”
Why are so many people renting today?
Donovan said that two groups of people are boosting the demand for apartment units today, renters by necessity and those who because of the work-from-home movement now have more flexibility on where they must live.
Donovan said that high interest rates have made mortgages less affordable for many people who would prefer to own but instead have chosen to rent until these rates fall.
High housing prices are also pushing more potential buyers into the renter-by-necessity category. There’s a shortage of single-family homes on the market, too, which is helping to keep housing prices too high for many potential buyers.
“A lot of people can’t afford not only the down payment but also the ongoing mortgage payments and taxes, insurance and maintenance of owning a home,” Donovan said.
The second group of people providing a boost to the apartment market are those who can work from home, even those who can work remotely on a part-time basis. These people now can work in locations that might otherwise have been too far for a daily commute.
“There is a whole new group of individuals who have more flexibility in terms of the location from which they work,” Donovan said. “People are prioritizing flexibility. They don’t mind moving from one city to another. It’s easier to do that if you rent instead of own. People who are renters by choice are renting later into their lives. A lot of that has to do with them having jobs with more flexibility.”
Suburban or urban?
And what about where renters are living? Are more choosing to rent in the urban centers of their cities or are they instead choosing the larger spaces and quiet of the suburbs?
Donovan said that the answer is both market- and individual-dependent. Simply put, some renters prefer the larger spaces and amenities that you might find in suburban apartment projects. Others want to live in cities in which they can walk to public transportation, restaurants and theaters.
“It’s an interesting give and take,” Donovan said. “Younger people put more value on access to bars, restaurants and entertainment. They might put more value on their time and want to be in close proximity with their job if they still work in the office. At the same time, there are forces in the other direction. Some renters prioritize the extra space that you can get in the suburbs because they are spending more time at home than they have in prior years. There are drivers for both urban and suburban living.”