In the 2022 US housing report from the National Association of Realtors and, which operates for the NAR, the big news is more of the same. The market is now, by their count, 6.5 million new single-family homes short of population and household formation growth. For multifamily, that turns into good economic news.

It’s impossible to look at multifamily independent of single-family homes because the two markets are intertwined with household formation. Between 2012 and 2022, there were 15.6 million household formations in the US, according to NAR, with nearly 2.1 million last year.

As formations happen, they need to live someplace, but there aren’t enough traditional single-family homes. During those 10 years between 2012 and 2022, 9.03 million single-family homes were started, with 8.5 million completed. That would be a 7.1-million-unit gap. There were also 4.2 million multifamily unit starts and 3.4 million completions.

The home ownership rate oscillates between about 63% and, at its high point in the fourth quarter of 2004, 69.2%. The current level is 65.9%. That should have meant more like 10.3 million completed single-family homes.

The market gap is where multifamily provides something of a stopgap. As NAR noted, “The gap between single-family home constructions and household formations grew to 6.5 million homes between 2012 and 2022. However, including multi-family home construction reduces this gap to 2.3 million homes.”

However, there weren’t enough multifamily units created to accommodate 34.1% of the housing volume, which would be 5.4 million, far more than the 3.4 million delivered.

This is where the market turns interesting. In 2022, multifamily unit construction increased, “reaching 35.1% of all housing starts by the end of the year, a level not seen since 2015.” That is a rate at which the housing market could begin to catch up and hit a sustainable stride.

Looking at the NAR analysis, over the 10-year period, 340,000 multifamily units were delivered per year on average. A recent research brief from CBRE projected that 716,000 multifamily units will reach the market within the next 24 months, or 358,000 a year, or a roughly 5.2% increase over the baseline. That’s an improvement, but not enough to catch up in the short run.

“If only single-family homes are considered, the rate of housing starts would need to triple to keep up with demand and close the existing 6.5 million home gap in 3 to 4 years” NAR wrote. “However, if the rate of total (multi- & single-family) housing starts increased by 50% from the 2022 rate to an average rate of 2.3 million housing starts per year, a pace of construction on par with what we saw in the early 1970s and some of the peak months for building in the mid-2000s,  it would take between 2 and 3 years to close the existing 2.3 million home gap, assuming the 2012 – 2019 average rate of household formations (~1.3 million households per year).”

One lesson for the multifamily industry to take — supported by the fuller CBRE analysis — is that the housing need is so great, worries about an oversupply overwhelming demand and leading to an undercutting of the market are probably unfounded.


Source:  GlobeSt.


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What a ride! For the past five years, apartment building owners hit the jackpot with their property values going up nationally by 37%, according to Marcus and Millichap. This was fueled by record rental increases of 13.5% in 2021 and 6.2% in 2022 and mortgage rates hitting their lowest ever in January 2021. But this trend is seemingly slowing. According to CBRE, the average multifamily cap rate went up by 38 basis points to 4.49% in the last quarter of 2022, which means prices are starting to come down. And thank goodness!

As a commercial mortgage banker specializing in multifamily financing nationally, 2022 was an extremely difficult year. It was a head-on collision between property values going up and mortgage rates going up. This produced smaller loan sizes, killing many of our deals. It wasn’t pleasant telling my client, “Sorry, 40% down is no longer going to cut it. Can you come up with 50%?” He replied, “Really? I was only getting a 4% cash-on-cash return, and now you want me to be happy with 2%.” I told him to negotiate the price down with the seller, who opted to take the property off the market instead.

Why Both Buyers And Sellers Have Their Brakes On

Although multifamily is the most sought-after asset class in the commercial real estate market today, prices remain high. This is a result of low supply and demand. In fact, the 4th quarter of 2022 hit the lowest level for both since 2009, according to Moody Analytics.

So, it’s no wonder that both buyers and sellers have their brakes on. Why? Because many buyers can’t figure out what a property is really worth today. Worse yet, they are afraid they are buying at the top of the market with a recession around the corner. And many sellers are in love with those high prices. They know that this is not a good time to sell with rates being so high. I’ve found that most are financially strong and don’t have to sell. They can just wait for rates to come down—snug in the comfort of the very low long-term rates they have on the property.

Why Multifamily Sales Prices Could Come Down Slowly In 2023

The good news for sellers is that the economy seems to be getting stronger, with wages climbing 6.3% for jobs posted on Indeed and 4.8 million jobs created in 2022. Even better, in January 2023, 517,000 new jobs were created, and unemployment hit a 53-year low at 3.4%. Many sellers, real estate brokers and property managers I talk with are arguing that this should justify today’s high multifamily prices and support more rental increases in 2023 as wages have gone up too.

But I think the data from the last quarter of 2022 supports a different argument—that multifamily prices must come down. According to CBRE, new investment in multifamily property fell by 70% (download required). Why? Because investors couldn’t make the numbers work, and the future did not look bright. According to Fannie Mae, there was a negative demand for multifamily units of -103,485 at the end of 2022. Now if we add to this the 783,000 new apartment units they report coming online in 2023, this is a recipe for rents remaining flat and rental concessions on the rise.

Savvy property investors know that if they are going to buy high, they have to raise rents to achieve the return they need in the future. This goes right to their bottom line, raising the net operating income in the income approach of a commercial appraisal and raising property value. But as noted in the report above, Fannie Mae is expecting rents to only achieve a 1.5% increase in 2023.

Today’s high prices just don’t seem sustainable, or I should say, they are not based in reality. The reality is that too many units are available for rent, too many units are coming online and too many renters are already paying more than they can afford with inflation. The reality is what an investor is willing to put down on a loan with today’s high mortgage rates. The reality is that those rates are likely to go higher as the Fed struggles to lower inflation to their benchmark of 2%. It’s at 6.3% now. And the reality is what an investor needs to earn.

A client of mine recently summed it up perfectly: “If I buy at today’s prices, I will be paying what the property will be worth in two years. And that’s if I can raise rents enough. Why would I do that?”

What does all this mean? If you are a multifamily investor, you might be better off waiting until prices come down. I think they will by the last quarter of 2023, as appraisal valuations come down and more sellers must sell due to divorce, partnership breakup, loan maturity or death. Of course, those who have the time may want to make lowball offers on properties with under-market rents in good neighborhoods where renters can afford future rent increases and wait for one to stick.

If you are a seller or listing real estate broker, unless you want to wait for a cash buyer, it’s important to not only sell the property’s upsides and value adds but also think about the buyers’ expectations for earnings. Based on actual net operating income, current interest rates and down payment requirement, what sale price will bring the deal to the closing table?

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.


Source:  Forbes

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Real estate may not be America’s — or the federal government’s — sweetheart for long.

President Joseph Biden just released a proposed 2024 budget in which he pitched eliminating tax breaks for real estate and private equity firms as part of his efforts to cut the country’s budget deficits by nearly $3 trillion over the next decade.

The White House is aiming to recover about $19 billion by closing the loophole known as the “like-kind exchange,” or 1031 exchange. The loophole lets real estate firms put off paying capital gains taxes from income earned on property sales as long as they make an investment in a similar property elsewhere.

The Biden administration said the real estate industry was the only one getting a “sweetheart deal” from the federal government and equated the tax break to an interest-free loan.

Other items in the budget, such as a 25 percent minimum income tax on the top 0.01 percent of earners, also known as a billionaire’s tax, would also have implications for top real estate executives. Biden also called on Congress to raise the income tax rate from 37 percent to 39.6 percent for people making more than $400,000 and couples pulling in more than $450,000 per year.

Corporations in general could also have an income tax rate of 28 percent, an increase from the 21 percent they currently pay, but still a big reduction from the 35 percent that was expected from corporations before 2017.

“We found that in 2020 when I took office, that 55 major corporations, Fortune 500 companies, paid zero in federal income tax on $40 billion in profit,” Biden said during his remarks. “When I got elected, there were roughly 650 billionaires in America. Now there’s over 1,000. You know how much tax they pay? Three percent. … No billionaire should be paying less than a schoolteacher or a firefighter.”

Biden’s budget instead prioritizes making housing more affordable through programs such as the Neighborhood Homes Tax Credit, which his administration wants to fund with $16 billion over 10 years, and expanding the Low-Income Housing Tax Credit with a $28 billion infusion of funds.

The budget proposal also would set aside $10 billion for planning and housing capital grants for state and local governments to make reforms and streamline building new affordable housing projects on their own. Overall, the budget puts $175 billion toward programs that could facilitate the development and rehabilitation of affordable housing.

Transit in the tri-state region is also a big investment in Biden’s budget. Biden promised about $700 million for construction of the Hudson Tunnel Project — which could stabilize service in the long term on the Northeast Corridor — and $496 million for phase two of the Second Avenue Subway, an opportunity for transit-oriented development


Source: Commercial Observer


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As they say, if you don’t want the answer, don’t ask the question. But Congress did insist that Federal Reserve Chair Jerome Powell talk about the economy and the Fed’s take this morning. His testimony is probably not what most people want to hear, but certainly what businesspeople, especially in CRE, need to.

If, like an economic Dylan Thomas, you were concerned that the Fed’s policies might go gentle into that good night, don’t worry, they aren’t.

In the testimony, Powell quickly invoked the Fed’s dual mandate of promoting maximum employment and stable prices. Notice, there is no direct mention of easing business costs or supporting asset prices. Those are supposed to come as byproducts — boost business to indirectly promote employment and slow it to moderate prices.

“We have covered a lot of ground, and the full effects of our tightening so far are yet to be felt,” Powell said, for those who want a pause to assess progress. “Even so, we have more work to do. Our policy actions are guided by our dual mandate to promote maximum employment and stable prices. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of labor market conditions that benefit all.”


Or, as Oxford Economics translated in an emailed note: “Fed Chair Jerome Powell used his semi-annual testimony to push back against financial markets as his comments were hawkish, noting that the terminal rate for the fed funds rate could be higher than previously anticipated. He noted that he isn’t hesitant to increase the pace of rate hikes if the data on employment and inflation continue to come in stronger than anticipated.”

Although inflation had seemed to be slowing, January was a jarring reminder that inexorable progress toward goals is unusual. Jobs, consumer spending, manufacturing numbers, and inflation “reversed the softening trends that we had seen in the data just a month ago.”

It was the “breadth of the reversal” that meant inflation was running hotter than during the last meeting of the Fed’s Federal Open Market Committee. And even then, the underlying message was not to expect immediate lower interest rates.

Inflation “remains well above the FOMC’s longer-run objective of 2 percent,” and Powell was talking not just the overall number, in which housing costs were a major driver. He specifically mentioned core personal consumption expenditures (PCE) inflation without the volatility of food and energy that push upwards, and core services without housing, which discounts that outlier.

“Although nominal wage gains have slowed somewhat in recent months, they remain above what is consistent with 2 percent inflation and current trends in productivity,” said Powell. “Strong wage growth is good for workers but only if it is not eroded by inflation.”


Then he got to interest rates. “We continue to anticipate that ongoing increases in the target range for the federal funds rate will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In addition, we are continuing the process of significantly reducing the size of our balance sheet.”

So, continuation of maybe 25-basis point increases and also continued scaling down of the balance sheet, which means reducing purchases of bonds that help fuel home mortgages and, so, that entire part of the construction and sales ecosystem.

However, the maybe is not to be ignored.

“While a quarter-point increase in the Federal Funds rate is still the most likely outcome of the Federal Reserve’s March meeting, expect the Fed to adopt a half-point increase in March if data on inflation and labor conditions continue to run hotter than expected,” said Marty Green, a principal with mortgage law firm, Polunsky Beitel Green, in an emailed note.


Source:  GlobeSt.

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Florida commercial property owners that have been dealing with escalating insurance costs for years are in for more bad news.

This year, insurance rates in the state are expected to go up by 45 percent to 50 percent, and a doubling of premiums won’t be out of the question, according to a new Yardi Matrix report. While coastal regions are most susceptible to hurricane damage, the increases apply to inland areas as well, the report says.

To many Florida real estate owners and insurance industry insiders, the cause is familiar: Hefty payouts from previous weather-related events left carriers insolvent. Most recently, Hurricane Ian ripped through the state’s Gulf Coast last September, and resulted in more than $50 billion in damage, the report says. Plus, some insurers are averse to covering real estate in the high-risk state, altogether. This leaves less competition for carriers that are left in the market, allowing them to raise rates.

Although skyrocketing premiums are a nationwide issue, states exposed to climate change-related risks will feel the most pain. Aside from Florida, the report points to Texas.

“One Texas community with no claims the prior four years and no increase in coverage received a 17 percent premium increase,” Debra Morgan, managing director at Dallas-based advisory, assurance and tax firm CohnReznick, said in the report.

Florida lawmakers have pushed to tackle the insurance crisis for residential real estate. In a special session last December, they made it harder for homeowners to sue insurers, in an aim to entice carriers to return to the state.

But the crisis necessitates lender reform, industry experts argue in the Yardi Matrix report.

Mortgage lenders often require full wind and flood coverage on commercial real estate in flood zones. Also, many financiers tack on a requirement for coverage of business income losses caused by flooding.

Advocates say that properties are often overinsured to cover extreme losses that rarely occur,” writes Paul Fiorilla, author of the Yardi Matrix report.

Danielle Lombardo, chair of New York-based insurance and risk-management advisory firm Lockton Global Real Estate, said in the report that a potential workaround to lenders’ hefty requirements exists. Instead of requiring full coverage, insurance rates could be based on a “true probable maximum loss methodology,” or the maximum possible loss from a catastrophic event.

For example, lenders might require $40 million in coverage for wind damage, even though modeling would show that the maximum loss for the property would be closer to $10 million.

“The premium for $40 million of coverage might be $3.7 million annually, compared to $1 million for $10 million of coverage,” the report says, citing Lombardo. That is “a margin large enough that it could create a delinquency or distress for some properties.”


Source:  The Real Deal


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As macroeconomic turmoil has roiled financial markets and institutions retreat from real estate, wealthy individuals have become the dominant buying class.

Private investors were the most active buyers for worldwide commercial real estate last year, purchasing $455B in properties, or 41% of the global investment total, according to a Knight Frank global wealth report.

For the first time on record, private buyers’ share of the market eclipsed those of institutional investors, which bought a total of $440B last year, a 28% decline in their investment activity in 2021, the Knight Frank report found. Private wealth from the U.S. in particular is projected to be the most active of those investors this year as well. Private buying activity fell just 8% from last year, by comparison.

“In order to navigate the higher inflationary environment, investors may pivot towards commercial real estate due to its strong growth potential, particularly in assets with indexation,” Knight Frank associate Antonia Haralambous wrote in the report. “Sixty-nine percent of wealthy investors expect growth in their portfolio this year, with confidence driven by asset repricing, perceived value opportunities and an expected economic rebound.”

The hunt for value is evident in which asset classes the investors put money into. Private buyers bought $62.5B of retail properties last year, 9% more than in 2021, and $30.6B of hotels, a 17% increase. Office was the second-most-active asset class, with $84.1B of purchases, a 4% dip from 2021. Private investors spent $194.9B on apartment properties last year, a 13% decline from 2021, per Knight Frank.

Private buyers’ newfound perch atop the CRE investment pecking order reflects the aftermath of the Federal Reserve’s interest rate hikes, which have changed the risk calculus for investing. All-cash buyers were increasingly the last bidder standing for properties at the end of last year, Bisnow previously reported, as lending dried up.


Source:  Bisnow

Mortgage Rates Keep Escalating

Mortgage rates have kept rising over the past month, with one outlet reporting 30-year loans averaging more than 7% this week for the first time since October.

Mortgage News Daily Thursday reported 30-year, fixed-rate mortgages averaging 7.1%, though a weekly lender survey by government-backed loan agency Freddie Mac put the 30-year loan average at 6.65% for the week ended March 2. Most mortgage rate reports are averages based on national lender surveys, and Freddie Mac has noted there is now a wide range of rate offerings.

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“As we started the year, the 30-year, fixed-rate mortgage decreased with expectations of lower economic growth, inflation and a loosening of monetary policy,” Freddie Mac Chief Economist Sam Khater said in a statement Thursday. “However, given sustained economic growth and continued inflation, mortgage rates boomeranged and are inching up toward 7%.”

Freddie Mac noted 30-year, fixed-rate loans averaged 3.76% and 15-year loans averaged 3.01% at the same point of 2022. “Now that rates are moving up, affordability is hindered and making it difficult for potential buyers to act, particularly for repeat buyers with existing mortgages at less than half of current rates,” Khater said.

Annual inflation remains near 40-year highs while declining in recent months to 6.4% in January. The Federal Reserve continues to raise its key lending rate in efforts to bring inflation closer to 2%, sparking rate hikes in many types of consumer and business loans.

It comes as the gap widened in the home ownership rate between Blacks and whites in the United States.

“As we started the year, the 30-year, fixed-rate mortgage decreased with expectations of lower economic growth, inflation and a loosening of monetary policy,” Freddie Mac Chief Economist Sam Khater said in a statement Thursday. “However, given sustained economic growth and continued inflation, mortgage rates boomeranged and are inching up toward 7%.”

Freddie Mac noted 30-year, fixed-rate loans averaged 3.76% and 15-year loans averaged 3.01% at the same point of 2022. “Now that rates are moving up, affordability is hindered and making it difficult for potential buyers to act, particularly for repeat buyers with existing mortgages at less than half of current rates,” Khater said.

Annual inflation remains near 40-year highs while declining in recent months to 6.4% in January. The Federal Reserve continues to raise its key lending rate in efforts to bring inflation closer to 2%, sparking rate hikes in many types of consumer and business loans.

It comes as the gap widened in the home ownership rate between Blacks and whites in the United States.

Black-White Home Ownership


Source:  CoStar

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Multifamily will likely experience little distress this year, despite a deceleration in debt origination since the beginning of 2022.

Activity has “gradually decelerated” since Q1 2022, the second-best quarter on record for debt originations, according to an analysis from Newmark, which also notes that “preliminary loan figures overstate the severity of the slowdown” in Q4.

“The year-over-year comparison is severe, but the fourth quarter of 2021 was a very high bar to match,” the new report notes. “Projected volumes for the fourth quarter of 2022 are still the third-best fourth-quarter performance.”

The Sun Belt accounted for 57.9% of overall multifamily investment in 2022, led by Dallas, Atlanta, Houston and Phoenix, which together accounted for 21.6% of annual volume. Of the top 25 markets by volume, New York, Nashville and Philadelphia posted double-digit year-over-year sales volume growth.

But while December 2022 may have experienced a greater-than-usual seasonal boost as borrowers sought to capitalize on sharp declines in Treasury yields and spreads, Newmark says the question remains as to whether that momentum carried into the first quarter of this year.  With that said, wth the exception of loans originated in 2021, mark-to-market LTVs “are well-contained,” something that can’t be said for many office and retail vintages.

Banks leaned in heavily to the asset class in 2022, with bank exposure to loans secured by multifamily properties increasing by $11 billion from January 2022 to January 2023. But Newmark says this is unlikely to continue unabated, creating a liquidity gap in the market. Banks are also tightening lending standards and shrinking the profile of both assets and sponsors with whom they’re willing to lend.

“Banks are likely to be less active as they digest their expanded loan books, and the GSE’s will be active but static on volumes,” the firm notes. “The recent decline in spreads and reduced volatility in bond yields could incentivize market-driven lenders, such as CMBS, debt funds and life insurance companies to be more active on the margin. There is already some evidence of this in the corporate bond market, with new issuance picking up.”

The market may be also subject to more ups and downs as a result of lending caps on GSEs and a move by the entities to more “mission-driven” lending.

“As the market grows, they are providing less proportional and more targeted liquidity support, which makes a repeat of 2009 less likely but also leaves the market subject to greater ‘normal’ volatility,” the report notes.

Record quantities of debt are on track to mature by 2024, and Newmark says borrowers will face markedly higher borrowing costs as loans mature.

“Higher debt costs on refinancing will lower return for all and will give rise to a range of reactions within the market,” the report notes. “Some borrowers will choose to pay down debt, especially if the asset has appreciated meaningfully. Others will refinance the principal or partially pay down, whereas in a lower cost of capital environment, they would have re-levered. Still others will be unable to make the math work and will need to pursue a loan modification, return the keys and/or source rescue equity at an appropriate price point.”

Despite that, the asset class remains a top destination for capital globally.  International investment in US multifamily assets as a percentage of total US commercial real estate totaled 40.3% in 2022, up 990 basis points from the 2015-2019 average of 30.4%. And among the US regions, total returns in the Southeast have outpaced the broader market on short, intermediate and long-term bases. Garden-style properties throughout the Southeast have been a particularly strong niche within the sector, outpacing the US multifamily index by 440 basis points over the past decade.


Source:  GlobeSt.

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It’s been a tremendous start to 2023 for hotel investors who are enjoying record sales for quality assets in highly desirable and growing markets, according to a report from JLL.

The $850 million sale of the Diplomat Beach Resort (pictured above) in Hollywood, Florida, was the third-largest single-asset sale in US history.

The recent closing of the AC Hotel Phoenix Biltmore set a record price-per-key for upscale select-service assets in the Phoenix market.

Kevin Davis, Americas CEO, JLL Hotels & Hospitality Group, said in prepared remarks that investors are buying into the thesis that long-term growth trends in certain markets will outweigh near-term capital markets dislocation.

“As a result, these investors are willing to buy at cap rates that are lower than the cost of debt because the growth story is so compelling.”


The ‘Hottest Asset Class’

Brandon Lewe, vice president of Sales at Ten-X, tells that overall, hotels are currently the “hottest” asset class on Ten-X, with momentum building year over year, further highlighting a strong hotel sales outlook.

“Buyers love the category,” Lewe said. “Last year hotels had the highest trade rate (62%) of any asset class and this year, even more investors want to buy.”

Hotel properties had twice the number of bidders per property as the next most popular asset class, he said. “And the trade rate has climbed 10 percentage points – to 72% – for properties that have gone to auction this year.

“We see more inventory coming online and that inventory is high quality, coming from institutional investors. Two of the largest U.S. institutional investors are bringing an influx of new inventory to our platform. ‘SMILE’ states, especially Texas, are hot locations for sellers.”


Extended Stay Cap Rates Approaching Multifamily

Matt McElhare, senior director, Extended Stay Brands at Choice Hotels International, tells that generally, “everyone is looking to add exposure to the segment given industry performance and profitability relative to traditional hotels.”

Extended stay at a lower price point provides a different return and risk profile than a traditional hotel or upscale hotel.

“We’ve seen cap rates approaching multifamily levels of the last two years,” McElhare said.

“The demand picture (2x supply, emerging trends providing tailwinds e.g. relocations, reshoring of supply chains, infrastructure, etc.) is really strong, which, combined with the difficulty adding supply in the near/medium term due to higher cost of capital and construction costs, is creating a favorable picture for high performance continuing in the extended stay segment.”

He said the performance outlook is bolstering demand for the acquisition of existing extended-stay hotels despite low cap rates and high valuations, particularly in areas of growth such as the Carolinas, Florida, and Texas.

“Lenders have historically treated hospitality financing as one big bucket but we’re seeing encouraging changes there as lenders recognize the different risk/return profile and think about the segment differently,” McElhare said.

McElhare tells that activity for large institutional capital in the space has remained elevated despite the higher costs of capital and construction hard costs as well as evaluations for existing extended-stay product.

Higher Occupancy Means Hiring Challenges

The American Hotel & Lodging Association (AHLA) and Oxford Economics recently reported that it expects hotel-generated state and local tax revenue to set a record at $46.71 billion this year.

Additionally, it sees average U.S. hotel occupancy reaching 63.8% in 2023 – just shy of 2019’s level of 65.9%.

“Staffing is expected to remain a challenge for many U.S. hotels in 2023, as the industry continues to grow its workforce back to pre-pandemic levels,” AHLA said in a release.

Nearly 100,000 hotel jobs are currently open across the nation as of Q4 2022, according to Indeed, even as “national average hotel wages were at historic highs of over $23/hour and hotel benefits and flexibility are better than ever,” according to AHLA.


Source:  GlobeSt.



It’s a bit of same ol’, same ol’ for now in multifamily deal-making two months into 2023 – not a whole lot.

“Buyers are cautious, facing higher financing costs and downgraded projections of future rent growth,” writes, Paul Fiorilla, director of research, Yardi Matrix.

Cap rates averaged 5% at year-end 2022, up from the low- to mid-4% range at the beginning of the year, per Matrix.

“Most apartment owners are holding on to properties unless there is a reason to sell, such as a death, the dissolution of a partnership, or a capital event like a maturing mortgage that creates a need for restructuring,” Fiorilla said.

He said he expects distress to increase.

“Banks have become conservative with the prospect of a widely projected economic downturn, so borrowers are facing both rising rates and less leverage.”

There are several scenarios that will lead to distress in 2023, according to the report.

Properties that were financed at historically low rates in recent years coming up for maturity at higher prevailing rates; properties whose interest rate cap has expired and are now facing a large jump in debt-service payments; and properties that have a downturn in performance.

Indeed, despite the sector’s issues, many investors view multifamily as a safer place to park capital, Fiorilla said.

“Transaction activity will pick up when market conditions return to some semblance of stability and market players believe they can underwrite with a higher level of certainty than exists today,” he said.

Sellers Could Forgo Refinancing and Sell

Ian Bel, managing principal and CEO of Olive Tree Holdings, tells that market transaction activity will begin to recover in the second half of 2023.

“Given where debt and rate cap pricing are today, we expect to see an uptick in sellers that are opting to forgo refinancing and put their assets on the market,” Bell said.

“While volatility remains in the treasury rates, the swings have become more muted, allowing more certainty and visibility into the debt pricing. We are optimistic that this reduction in volatility will encourage more lenders to come into the market and hopefully reduce spreads.

“When the capital markets begin to thaw, lender demand is likely going to be largest for stabilized cash flowing assets in Tier I markets.”

Sellers Still Want 2021 Prices and Exit Cap Rates

But John Drachman, co-founder, Waterford Property Company, does not believe that transaction volume on the multifamily side will recover anytime soon.

“The bid-ask spread right now is extremely wide as buyers deal with the rising interest rates mixed with the near-term, choppy property fundamental outlook and sellers still want 2021 prices and exit cap rates,” Drachman said.

“In many ways, both sides are waiting for the other side to blink which has slowed the market. You also have many sellers who locked in long-term fixed-rate financing in 2020-2022 which does not make them feel forced to sell at all.

“You will see transaction volume pick up early next year when the realities of the current cycle hit and groups with short-term floating rate debt feel the pressure to sell. Until then transaction volume will be down.”

Fewer Sellers Means More Competition

Robert Stepp, Principal with Stepp Commercial Group, tells that in 2022, Stepp Commercial Group had a significant number of listings with Los Angeles-area sellers who were frustrated with rent control and other problematic apartment legislation.

Stepp Commercial Group completed over $200 million in transactions throughout greater Los Angeles last year and helped identify 1031 exchange opportunities in several states including Arizona, Florida, and Texas.

Clients were looking to trade into states that provided a stronger ROI for the long-term and fewer restrictions, Stepp said.

“We see that trend continuing into 2023 as owners seeking a passive income want to enjoy stability and realize wealth management goals,” he added.

“The market experienced a slowdown in transactions in late 2022 and that is continuing in Q1 2023. With interest rates rising, sellers are having to look at their asking cap rates and adjust their pricing accordingly.

“The good news is that with fewer sellers, there is more competition for the assets on the market. While the listings aren’t resulting in as many offers as a few years ago, they are still garnering strong attention from fewer buyers who have a significant amount of capital to put down, many paying all cash.

“Ultimately, many major markets across the nation continue to experience a dearth of rental housing options. With fewer construction starts due to higher development and labor costs, we can expect to see more multifamily trades later this year as confidence in the market is likely to return as we ease into an adjusted selling environment.”

Staying Committed to Multifamily Sector

Steve Figari, co-founder and managing partner at Shoreham Capital, tells that despite an overall slowdown across the industry, markets like Florida and the larger Sun Belt region, are still experiencing significant demand.

“We are focusing on areas with positive supply/demand dynamics and long-term growth rates,” Figari said. “We are also looking at deals that may arise from special situations, including distress, where there are opportunities to recapitalize and reposition properties.”

He said that Shoreham remains committed to the multifamily sector because, “with this approach, we believe we will emerge with an irreplaceable portfolio as market fundamentals stabilize.”

Secondary Markets Could be First to Get New Capital

Mike Madsen, vice president of acquisitions and economics, RealSource Properties, tells that month-over-month changes in macro rental rates have normalized since August but lag in Consumer Price Index trailing 12-month measurements.

“The case for the Fed to achieve their desired soft landing is building as employment remains resilient,” Madsen said.

“If the Ukraine-Russia conflict deescalates during the first half of the year that could also put downward pressure on energy, transportation, and food prices. Although uncertainly remains, the record levels of capital ready to bounce could move quickly back into buy mode in Q3, aiming for a discount from peak prices.

“We expect the 10-year rate might front-run a Fed pause, opening a window to lock in lower commercial mortgage rates from the peak. A soft landing and top in the Fed Funds rate in Q3 could be a scenario the lights could turn on as quickly as they turned off as lender cautionary levers and spreads bake in less risk of weakening rental demand.

“Capital could first jump into select secondary metros with strong rent growth expectations without oversupply threats.”

Renters Won’t Be Becoming Home Buyers

Joe Smazal, senior managing partner, Interra Realty in Chicago, tells that in the middle-market space, he’s still seeing healthy sales velocity for well-located assets in Chicagoland.

“Private capital remains interested in acquiring multifamily assets for long-term ownership, and investors have been encouraged by strong rental market and operations in Chicago,” according to Smazal. “We also don’t expect to see much attrition from renters going into first-time homeownership this year.”

Relative to other markets that were more popular over the last couple of years, Chicago has shown a lot of stability and, depending on the specific location within the city, still presents opportunities to acquire deals with cap rates at or above interest rates, Smazal said.

“If we see rates come down and/or less trepidation from the macroeconomic uncertainty, we’ll see the floodgates open.”


Source:  GlobeSt.