Multifamily capital markets have seen the greatest drop in transaction activity compared to other CRE sectors, but all CRE markets have seen lower sales numbers in the current interest rate environment. As members of the Fed meet in Jackson Hole, the potential for an extended high-interest-rate regime could have a significant impact on commercial real estate.

Berkshire Hathaway's recent investment in homebuilding companies is a sound endorsement of the housing sector and continued strong demand for homes, and Warren Buffet's new focus is supported by decreasing building material costs and increased permitting and starts for single family home projects, indicating continued interest in purchasing a home, even as mortgage rates make home ownership more costly. Housing demand is highly correlated, and these signs of increased demand in the single family home space point to improved future performance in the multifamily market and a clear end of the current cooling period for the apartment market by 2024.

Mid-year updates and forecasts for the apartment and CRE markets uniformly note the improved economic conditions compared to the start of the year, but forecasts for rent growth and capital markets are diverging. Under one scenario, a recession in late 2023/early 2024 will prompt an interest rate reduction that could stimulate CRE capital markets, but under an alternative scenario, we are spared from a recession but deal with a longer period of elevated interest rates and inflation. Regardless of the ultimate outcome, interest rates are expected to remain high for at least 6 months, and the potential for property distress has not gone away.

Sources discussed in this episode:

Gray Capital: “CPI Rent Growth Contradicts Market Reality” - https://www.graycapitalllc.com/rent-report/

GlobeSt: “WeWork Says It is at Risk for Bankruptcy. Has Co-Working Died?” - https://www.globest.com/2023/08/09/wework-says-it-is-at-risk-for-bankruptcy-has-co-working-died/

National Bureau of Economic Research: “Converting Brown Offices to Green Apartments” - https://www.nber.org/system/files/working_papers/w31530/w31530.pdf

TheRealDeal: “Office-to-resi conversions are financially feasible, but just barely: report” - https://therealdeal.com/new-york/2023/08/08/report-identifies-nyc-offices-ripe-for-resi-conversion/

CBRE: “Midyear Global Real Estate Outlook 2023” - https://www.cbre.com/insights/books/midyear-global-real-estate-market-outlook-2023/economic-outlook

RealPage: “As Annual Rent Growth Slips Below 1%, How Much Further Could Rents Cool?” - https://www.realpage.com/analytics/july-2023-apartment-market-update/

Institutional Property Advisors: “Midyear Multifamily Outlook” - https://www.institutionalpropertyadvisors.com/research/special-report/2023/08/ipa-midyear-multifamily-outlook-special-report

For the latest multifamily news from across the internet, visit the Gray Report website: ⁠https://www.grayreport.com/⁠

Sign up for our free multifamily newsletter here: ⁠https://www.graycapitalllc.com/newsletter⁠ 

DISCLAIMERS: This podcast does not constitute professional financial advice and is for educational/entertainment purposes only. This podcast is not an offer to invest.

Rent growth trends continue to moderate from last year's historic peak, and many of the top markets of last year have seen much lower rent growth due to the influx of apartments. Strong GDP numbers and a healthy job market, however, support continued housing demand and economic stability despite the elevated interest rate environment.

Sources discussed in this episode:

CoreLogic: “US Home Price Insights – August 2023” - https://www.corelogic.com/intelligence/us-home-price-insights-august-2023/

The White House: “Biden-⁠Harris Administration Announces Actions to Lower Housing Costs and Boost Supply” - https://www.whitehouse.gov/briefing-room/statements-releases/2023/07/27/biden-harris-administration-announces-actions-to-lower-housing-costs-and-boost-supply/

GlobeSt: “Converting Office & Retail to Affordable Housing May Soon Be Easier” - https://www.globest.com/2023/07/28/converting-office-retail-to-affordable-housing-may-soon-be-easier/

RealPage: “Stellar 2Q Apartment Demand in Key Markets” - https://www.realpage.com/analytics/markets-solid-2nd-quarter-demand/

RealPage: “Multifamily Development is Definitely Slowing” -  https://www.realpage.com/analytics/multifamily-permits-declining-june-2023/

Berkadia: “2023 Mid-Year National Report” - https://base.berkadia.com/wp-content/uploads/2023/07/Berkadia-Midyear-2023-Multifamily-Report-National-1.pdf
JLL: “JLL unveils first GPT model for commercial real estate” - https://www.us.jll.com/en/newsroom/jll-unveils-first-gpt-model-for-commercial-real-estate

The Federal Reserve raised the federal funds rate by 0.25%, and while Federal Reserve staff "are no longer forecasting a recession," others are more confident in a recession as the inevitable product of this lengthy period of elevated interest rates. Amidst this continuing economic uncertainty, the multifamily market has shown solid demand. That being said, nationwide rent growth projections are more subdued compared to historical averages, but Northeast and Midwest markets continue to outperform.

While there has been more optimism about the economy generally, apartment rent growth continues its moderation on a national level, with some notable regional variation. Unlike more costly markets in the West and South, recent apartment rent growth reporting highlights the consistent growth of more affordable multifamily markets in the Midwest, a trend that also extends to the homebuying market.

The multifamily market continues to steadily improve, with solid underlying fundamentals but softer demand in areas that have seen a major influx of supply, a situation that lines up with the mixture of positive and negative indicators for the broader housing market and for the economy as a whole. Both home prices and rents have recently shown negative year-over-year numbers, but they are increasing on a monthly basis and are showing greater strength as the summer months continue.

For the latest multifamily news from across the internet, visit the Gray Report website: ⁠https://www.grayreport.com/⁠