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Investor Sentiment Shifts Back to Multifamily Amid Broader CRE Decline

Investor interest is cooling across most commercial real estate sectors, but multifamily properties are regaining appeal, driven by high mortgage rates and rising single-family home prices.

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Good morning. Investor interest is down across most CRE sectors, but multifamily is gaining ground, fueled by looser conditions, high mortgage rates, and rising single-family home prices.

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Market Snapshot

S&P 500
GSPC
5,864.67
Pct Chg:
+0.40%
FTSE NAREIT
FNER
841.47
Pct Chg:
+0.71%
10Y Treasury
TNX
4.118%
Pct Chg:
+0.045
SOFR
30-DAY AVERAGE
4.96%
Pct Chg:
0.0%
*Data as of 10/18/2024 market close.

MARKET MOMENTUM

Investor Sentiment Shifts Back to Multifamily Amid Broader CRE Decline

As most commercial real estate sectors struggle, multifamily is staging a comeback, driven by high mortgage rates and rising single-family home costs.

Rebounding: While investor confidence in office, retail, and industrial real estate is down, multifamily is gaining ground. Altus Group’s Q3 2024 U.S. CRE Survey shows 69% of investors expect it to outperform other sectors, thanks to limited housing supply and barriers in the single-family market. Yet, multifamily transactions remain about 35% below pre-pandemic levels.

Steady absorption: Sun Belt markets like Phoenix, Dallas, and Atlanta saw a 20% jump in multifamily completions last year, but absorption rates above 90% have eased oversupply concerns. The Northeast, Midwest, and West—where construction is slower—are seeing even stronger occupancy rates, reaching up to 95%. With pending home sales down 13% YoY, multifamily demand rises as more buyers are priced out of homeownership.

Favorable financing: The October 2024 NMHC survey shows improvements in sales, equity, and debt financing, with all indices above 50. Debt availability increased due to a 28-point drop in the 10-year Treasury yield and a 50-point Fed rate cut. Equity financing also reached its most favorable level in over two years.

Looser conditions: NMHC’s Market Tightness Index remained below 50 for the ninth straight quarter, landing at 37. Despite looser conditions, absorption rates have kept up with supply, as 40% of respondents now view the market as looser, up from 27% in July. Elevated multifamily deliveries continue, but strong rental demand is absorbing much of the new inventory, suggesting continued resilience in the sector.

NMHC October 2024 Quarterly Survey of Apartment Market Conditions

➥ THE TAKEAWAY

Big picture: Despite softer market conditions and rising vacancies, multifamily investors see opportunities in better debt and sales conditions. The sector's adaptability and consistent demand suggest that rental housing isn't just a temporary trend—it reflects a broader, lasting shift in housing preferences.

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✍️ Editor’s Picks

  • Normalization period: Moody’s Kevin Fagan describes the commercial real estate market as stabilizing, with rising transaction volume and a shift in demand dynamics.

  • Portfolio sales: Lenders are increasingly selling large portfolios of properties and loans to rebalance commercial real estate holdings, signaling a potential market shift toward financial stabilization.

  • Sustainable building's secret weapon: Green Zip Tape delivers 2x faster drywall installation, up to 25 LEED credits, and game-changing tax savings for property investors. (sponsored)

  • Mortgage rates: The average 30-year U.S. mortgage rate climbed to 6.44%, driven by strong economic signals and rising Treasury yields, adding pressure on homebuyers and suppressing mortgage applications.

  • High risk: Developers built 300,000 flood-prone properties nationwide since 2019, despite escalating climate risks and insurance costs.

  • Gaining momentum: U.S. home builder confidence increased in October despite high mortgage rates and low affordability, driven by improving sales expectations for the next six months.

  • Oil bust: Lea County, New Mexico, now America’s top oil producer, is thriving on oil wealth but braces for an inevitable downturn, with officials fearing it could be severe.

🏘️ MULTIFAMILY

  • Buyer’s market: Despite strong demand, multifamily remains a buyer’s market due to record-high supply, with potential rent growth anticipated by 2026.

  • Hyde Park: An East Coast investor bought a 24-unit property in Hyde Park for $9 million as interest grows near the upcoming Obama Presidential Center.

  • Facing foreclosure: Falls Apartment Group risks losing two Pasadena complexes to foreclosure over a $33.5M debt, with auction set for November 5.

  • DFW BTR boom: After a slow start in 2024, Dallas-Fort Worth developers anticipate a surge in build-to-rent projects fueled by pent-up demand and easier financing.

  • Luxury housing: Extell Development acquired 655 Madison Ave for $160M, planning to replace the 24-story office tower with luxury condos and retail space.

🏭 Industrial

  • Cooling at the ports: Port-proximate real estate demand is declining as retailers revert to just-in-time inventory strategies, despite increased import volumes at major U.S. ports.

  • East Bay: Prologis sold a 112,620-square-foot Hayward distribution center to Beeline Group for $41 million, continuing its strategy of divesting non-strategic assets.

  • Big deal: Ambient Capital Partners bought a 49-acre industrial outdoor storage portfolio in Harrison and Kearny, marking New Jersey’s largest deal in the emerging asset class.

🏬 RETAIL

  • Fifth Ave revamp: NYC aims to transform 20 blocks of Fifth Avenue into a pedestrian-friendly boulevard, expanding sidewalks, adding seating, and reducing car lanes to enhance strolling and shopping.

  • Retail expansion: Ulta Beauty aims to open 200 new stores by 2027, targeting both established and smaller markets to reach 1,800 locations nationwide.

🏢 OFFICE

  • Soaring costs: U.S. office vacancies have led to over $43.5 billion in lost potential revenue, with New York City alone accounting for $7.6 billion.

  • Meta sublease: Strava will relocate its headquarters to a 41,000-square-foot space at 181 Fremont Street in San Francisco, subleased from Meta.

🏨 HOSPITALITY

  • Deal of the day: Sonesta will franchise 114 U.S. hotels owned by Service Properties Trust, shifting from management to franchise agreements as SVC sells these properties to reduce debt and enhance liquidity.


📈 CHART OF THE DAY

The valuation gap between listed and non-listed REITs is gone

Contrary to popular belief, valuation gaps between listed and non-listed REITs have closed, suggesting investors should consider both as differences in returns now hinge on NOI growth rather than cap rate disparities.


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