Even with the challenges of high interest rates, investors still believe in the multifamily market, with the latest research from Newmark showing that this sector continues to outrank any other asset classes when it comes to attracting investor dollars.
In its third quarter U.S. Multifamily Capital Markets Report, Newmark said that multifamily assets have accounted for 32.4% of all investment sales in the commercial real estate sector as of the end of the third quarter. That makes multifamily the most popular choice for investors, even outranking the industrial sector.
Mike Wolfson, author of Newmark’s report and managing director of multifamily capital markets research for the company, said that investors’ affinity for multifamily shouldn’t be surprising: The demand for multifamily units among renters remains high and isn’t expected to lessen anytime soon.
The challenges of the single-family housing market are a big reason for this. Wolfson said that the supply of single-family homes is far below the demand for housing. This makes it more difficult for buyers to find single-family homes.
And when they do find homes that fit their needs? They are often too expensive, as the price of single-family homes has risen rapidly in the last three years. Higher mortgage interest rates aren’t helping, either. When these rates are at 7% or higher, it makes it more difficult for buyers to afford the monthly mortgage payments necessary to buy even a median-priced home in major markets.
Many buyers are facing bidding wars for the homes they want to buy, Wolfson said. And these bidding wars are only boosting the need for more multifamily units.
“If 30 people bid on a home, you might end up with 29 of those bidders who need to live in a multifamily unit for another year,” Wolfson said.
Steady demand
Demand for multifamily units has been strong for most of this year, according to Newmark’s report. Newmark says that 171,000 multifamily units were absorbed in the second and third quarters of 2023. That’s up from the same quarters last year when multifamily absorption came in at a negative 148,000 units.
And the reason for these numbers? Many renters might like to enter the single-family housing market. But they’re struggling to find a home with today’s low supply of for-sale properties.
“Every major market throughout the country is not building enough single-family homes,” Wolfson said. “There are very few active listings on a historic basis. Then there are the higher interest rates. Those are pushing others out of the market.”
Research from the Mortgage Bankers Association backs up Wolfson’s points. According to the association’s Purchase Index, the number of people applying for mortgages to buy a home was down 20% for the week ending Nov. 24 when compared to the same week a year earlier.
“People are not slowing down their lives or having families. They need transitional housing, and the multifamily market is a huge beneficiary of that,” Wolfson said.
Consumers are also facing financial challenges that are keeping many from buying a home. Younger adults are still burdened with student loan debt. Consumers are again racking up debt on their credit cards, with the Federal Reserve Bank of New York reporting that cardholders had an average credit card balance of $5,733 in the second quarter of this year.
“This all sets up well for multifamily housing,” Wolfson said. “Many people can’t afford a home in major markets. This is a national story, not just one happening in New York or Chicago. It’s pretty much every market. There are a lot of people in the prime age group of 21 to 35 who want to become homeowners. But they can’t afford the down payment to buy a home or they can’t afford the monthly payments that come with higher-priced homes. The rental market is a huge beneficiary of this.”
Challenges ahead, too
This doesn’t mean that the multifamily sector doesn’t face challenges. One of these challenges? According to Newmark’s report, $682 billion in multifamily loans are scheduled to mature from 2023 through 2025.
Wolfson said that not all these loans will mature on schedule, with banks and lenders extending some of them. But many loans will mature during the next three years. And that could bring plenty of volatility to the multifamily sector.
Wolfson said that these maturing loans could bring opportunities to investors with some owners forced to sell, possibly at lower prices. Lenders might be forced to take over properties that they don’t want to own. They, too, might be willing to sell at lower prices.
“That $682 billion of loans might not all mature during the same time frame,” Wolfson said. “But even if they don’t, maturations will happen. That could set off a lot of activity.”
Another challenge in today’s multifamily sector? Sellers and buyers still can’t agree on sales prices for multifamily properties. Because of this, sales volume remains low compared to past years.
Wolfson, though, says that this state of inactivity can’t last forever.
“People have to transact in this business,” he said. “There has been a high level of inactivity. The market has stalled. But we see fundraising going on. We are hearing that people are more willing to meet at a middle price than they were six months ago. That is encouraging.”
No one can predict the future, but Wolfson said that he expects a slow fourth quarter of this year and a first quarter of next year that would rank as “not great” when it comes to multifamily sales. But in the latter half of next year? That’s when Wolfson said that he expects multifamily sales activity to start increasing again.
“Transactions need to happen,” Wolfson said. “It will come. But it won’t be like flipping on a switch. It will be gradual.”
