The Federal Reserve decided this week to maintain the current Federal funds rate without an increase (or decrease), but their updated economic projections suggest that the Fed is more driven to sustain these elevated rates through 2024, increasing their end-of-year 2024 projection from 4.6% in June to 5.1% now. While CRE pricing has been trending down since the start of this elevated interest rate regime, these extended projections of lasting high rates could accelerate further price discovery, especially in the context of the dramatic increase in loan maturities coming due in Q4 2023 and early 2024.

While recent topline inflation numbers may help justify the recent interest rate increase from the Federal Reserve, a more compelling signal of economic activity can be seen in the robust housing demand that has led to rebounding single family home prices in spite of the high mortgage rate environment, which is a strong indication of robust multifamily demand moving forward.

CBRE: “2023 U.S. Real Estate Market Outlook Midyear Review” - https://www.cbre.com/insights/reports/2023-us-real-estate-market-outlook-midyear-review

Yardi Matrix: “National Multifamily Report, August 2023” - https://www.yardimatrix.com/publications/download/file/4361-MatrixMultifamilyNationalReport-August2023

Apartment List: “Rents Continue to Dip, While Home Prices Rebound to All-Time Highs” - https://www.apartmentlist.com/research/rents-continue-to-dip-while-home-prices-rebound

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

The Harvard Joint Center for Housing Studies: “With Existing Inventories Historically Low, Homebuyers Turn to the New Home Market” - https://www.jchs.harvard.edu/blog/existing-inventories-historically-low-homebuyers-turn-new-home-market

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

Recent reports on the apartment market show year-over-year rent growth heading into negative territory after 18+ months of deceleration from its peak in late 2021/early-2022. Alongside lower rent growth and higher vacancy, apartment operators contend with rising expenses and higher interest rates, and the sharp increase in multifamily loan maturities in the coming months is a dramatic example of the potential for near-term distress in the market. Despite these ongoing challenges, the long-term fundamentals of the apartment market are strong. Climbing homebuying costs and consistently-high single-family home valuations signify continued high housing demand in spite of high interest rates, and the apartment market remained relatively stable while adding the most new apartment supply in decades, a mark of resilience for the sector that will strengthen as new supply is expected to decrease in the coming years.

Low transaction activity in the commercial real estate markets has some looking for "secret" distress, and while the growing perception that interest rates will remain high is slowly impacting price discovery, there is still room for prices to reach a point that would bring sales volumes in line with historical averages.

Katrina Greene is the Director of Property Management for Gray Residential, and her upcoming podcast, The Complex, will detail the complicated and crucial aspects of managing apartment properties.

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