Mid-Priced Apartment Demand Soars Amid Economic Uptick

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Leasing Surge in Mid-Priced Apartments with Improved Economy

In 2023, the U.S. multifamily market has seen a significant upswing in renter demand, especially for mid-priced apartments rated three stars. This shift marks a recovery from a sluggish performance in the latter half of 2022.

A surge in demand: There has been a 77% increase in occupancy over the last year, with 260,000 more units being filled than vacated. This surge is primarily in mid-priced, three-star properties, contrasting with the disappointing absorption of only 146,000 units in 2022.

Influencing the market: The market slump in 2022 was driven by a combination of high inflation, increased oil prices, and recession fears, which significantly impacted consumer confidence and demand, especially in mid- and low-priced properties. This led to renters seeking more affordable housing solutions or delaying household formation.

Improving economy: The rebound in 2023 has been fueled by improved consumer confidence, lower inflation, strong wage growth, and reduced recession fears. These factors have notably increased the demand for three-star properties by 54,000 units in the first three quarters of the year.

➥ THE TAKEAWAY

Positive outlook: The high-end segment of the market, comprising four- and five-star properties, has remained stable, thanks to the lower rent-to-income ratio of its renter households. Looking ahead, if the economy avoids a recession, multifamily demand could return to pre-pandemic levels by 2024, although supply is expected to exceed demand for the third consecutive year.

• Cool cash: Lineage Logistics, a major owner of cold storage real estate, plans to go public in 2024 with a potential valuation of $30B.

• Empowering everyone: Deregulating CRE supports mixed-use neighborhoods, wealth, and taller buildings, akin to YIMBY's residential focus.

• Surprising success: Mortgage REITs in 2Q23 experienced a nearly 80% increase in loan repayments, resulting in a 2.5% reduction in their collective portfolios to $92.67B.

• Housing retreat: NY Governor Hochul abandons a controversial housing legislation in favor of pursuing other solutions due to significant opposition.

• The price of paws: Blackstone (BX) will acquire pet care app Rover (ROVR) for $2.3B in an all-cash deal, with shares of Rover climbing 28% on the news.

• Really, really dumb: The strip mall investor that published the 11th hour press release to buy out WeWork (before pulling it) has been accused of manipulating shares and misusing client funds.

• Seismic shake-up: Fledging AI technology is estimated to disrupt up to 80% of all jobs, including in CRE, according to CoStar.

• Refinancing success: Hines secures a $300M refinancing deal for CityCenterDC, a major mixed-use complex in Downtown DC with 500 KSF of office space.

• Falling flat: Multifamily lending has dropped 55% YoY by Q3, with loan originations down 33% since 2Q23.

• Revolutionizing healthcare: Mayo Clinic plans a $5B redesign of its Rochester campus, creating "health neighborhoods" for streamlined patient care.

• Very disappointing: California startup Veev, known for its modular construction technology, faces shutdown due to a failed capital raise, blaming ongoing market challenges.

• Black Friday bounce: Black Friday online sales reached $9.8B, a 7.5% increase YoY, while in-store and e-commerce sales rose 2.5%.

• Industrial expansion: Invesco Real Estate (IARAX) partners with Faropoint to expand its industrial portfolio into last-mile warehouses, acquiring a minority stake in the platform.

• Loan lessons: In 2023, a new loan for the 11 West 42nd Street property was secured, totaling $330M, with an interest rate of 7.44% and an annual debt service payment of $20.4M.

High Borrowing Costs Weigh on Property Prices

CRE sale prices in October saw a decline consistent with the yearlong trend of higher rates, according to an analysis by CoStar.

Market trends: CoStar’s analysis utilized two key indices: the Value-Weighted U.S. Composite Index, focusing on large property sales in major cities, and the Equal-Weighted U.S. Composite Index, representing smaller, less expensive property deals. Both indices reported significant declines. The Value-Weighted index fell by 1.4% from September, marking an 8.7% decrease over 12 months. Similarly, the Equal-Weighted index dropped by 1.4% in October, showing almost no change year-over-year.

Influenced by interest: Chad Littell, CoStar’s national director of U.S. capital markets analytics, attributed these trends to fluctuations in the U.S. 10-year Treasury yield, a crucial benchmark for commercial real estate lending. With the yield peaking at 4.9% in October, the highest for the year, Littell predicts continued pressure on prices and a likely decrease in transaction volumes through the fourth quarter.

Hitting the brakes: The downturn varied across different market segments. Investment-grade properties saw the most significant decline, with a 60.3% drop in transactions and the largest year-over-year price decrease since March 2010. The multifamily sector also experienced substantial declines, with the value-weighted multifamily index dropping 19.8% since its peak in July 2022.

Slippery slope: Investment-grade prices took a big hit in October, the largest YoY drop since March 2010. The equal-weighted index for investment-grade assets slipped 1.5% in October and fell 12.1% over the past 12 months. The general commercial sub-index, consisting of smaller, lower-priced assets, slipped 0.9% in October but showed modest gains of 3.1% over the 12-month period.

➥ THE TAKEAWAY

Higher yields, lower expectations: The surge in the 10-year Treasury rate to 4.9% in October has led to a downturn in commercial real estate (CRE) sale prices, a trend that's expected to continue due to increased borrowing costs. This rise in yields is particularly impactful on the investment-grade property segment, which is facing the most significant price declines.

In a comprehensive study of debt fund returns since 2013, the average return of 10.8% was nearly met, achieved, or exceeded by the vast majority of these funds. Notably, smaller debt funds with raises up to $1.5B tended to outperform, while larger funds were more likely to meet or fall slightly below the average return.