While recent comments and reports depict our current moment as a substantial opportunity for multifamily investors, there has been little disagreement about the headwinds for apartment performance in 2024, with continued rent growth stagnation and elevated interest rates as prominent challengers for investors. A more favorable environment for multifamily asset performance is expected to develop moving into 2025, but for many apartment investors, the math simply does not work right now.

The Gray Capital team discusses cap rate trends and apartment supply. Also in this episode, Gray Capital President, CEO, and Co-Founder Spencer Gray brings Hannah Ott and Cameron Benz, powerhouse multifamily brokers on the Indianapolis Cushman & Wakefield team, into the studio for a discussion of what's happening on the ground for multifamily buyers and sellers.

Multifamily assets have proven their worth in both strong and weak economies, but cripplingly high interest rates have frozen the sales market for apartment properties in 2023, leaving the outlook unclear for 2024. Even though the potential for lenders to grant accommodations to troubled borrowers could extend the stagnation and uncertainty in the multifamily sales market, pressures on bank balance sheets could prevent lenders from providing help to many lenders.

Sources discussed in this episode:

Federal Reserve Instagram Account - https://www.instagram.com/federalreserveboard/

Bisnow: Could Discounted Loan Payoffs Be What Finally Restarts The CRE Debt Market?” - https://www.bisnow.com/national/news/capital-markets/debt-negotiations-stalling-discounted-payoff-option-120929

Business Insider: Biden's top economist says the key to ending the housing crisis is giving cities and developers monetary incentives to build more affordable homes - https://www.businessinsider.com/housing-crisis-monetary-incentives-build-affordable-housing-economist-jared-bernstein-2023-10

Apartment List: “National Rent Report, September 2023” -  https://www.apartmentlist.com/research/national-rent-data

Harvard Joint Center for Housing Studies “Home Prices and Interest Rates Still Rising, Shutting out More Potential Homebuyers” -  https://www.jchs.harvard.edu/blog/home-prices-and-interest-rates-still-rising-shutting-out-more-potential-homebuyers

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.

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.