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Small Multifamily Cap Rates Drop to 6%

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The small multifamily market saw notable developments in the third quarter, with cap rates averaging 6.0%. This marks an increase of 31 basis points compared to the same period last year and a rise of 98 basis points from the cyclical low recorded in 2023. The risk premium above the 10-year Treasury yield also grew, climbing 42 basis points to 201, which reflects a return to pre-pandemic levels.

According to Arbor, Q3 represented a positive shift for the small multifamily sector, with signs of market normalization. Key factors contributing to this improvement include rate cuts by the Federal Reserve, which have helped enhance pricing, cap rates, and credit conditions. Additionally, easing interest rate pressures, strong rental demand in many markets, and strengthened lending from government-sponsored enterprises have further supported the industry.

The National Multifamily Housing Council shares a similar view, noting that markets are among the least restrictive since July 2020. Sales volume and equity financing have notably improved since October, and debt financing conditions are stronger. The CRE Finance Council also reported that 85% of those surveyed expect positive market impacts, marking the highest optimism since Q3 of 2022.

However, the market is experiencing some challenges, such as a significant increase in inventory, which has slowed rent growth and raised vacancy rates. Arbor believes the ongoing demand for affordable housing will help offset these impacts. In addition, as GlobeSt.com has noted, two factors could contribute to a rise in inventory: 1) the growth in new units is concentrated in the South and West, where demographic trends are driving development, and 2) new construction starts are expected to slow in 2025, allowing demand to catch up to supply.

Looking ahead, Arbor highlighted that futures markets predict the Federal Reserve will continue to cut rates through 2025. In a recent speech, Fed Chair Jerome Powell expressed confidence that the economy and labor market can remain strong while inflation steadily declines to 2%. He also indicated that the Fed is moving toward a more neutral policy stance, though the exact path remains uncertain.

 

Source:  GlobeSt.

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The Odds Are Stacked Against Maturities Refinancing

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Almost any problem can be solved if there’s a realistic plan and the necessary materials are at hand. But miss what you need for the repair and there’s only so far that you can go. That’s a problem facing commercial real estate right now.

There is an “historic volume of mortgage maturities,” as a recent Trepp analysis of Federal Reserve Flow of Funds data showed: $2.78 trillion in commercial loans coming due by 2027.

But will there be enough money to keep the bulk out of trouble? Up until Wednesday, the 10-year yields were moving tentatively toward 5% and have been at levels not seen since 2007. The higher Treasury yields go, the harder it is to argue for riskier investments without a lot of extra return. Shorter-term Treasury yields are even higher.

Even with a slight retreat of the 10-year yield with the Fed’s hold on interest rates and Treasury slowing expansion of planned new bond issuance, there is still abundant safety at respectable returns that becomes difficult to compete with. CRE property valuations have plummeted, with the Fed saying that after the reductions they were still elevated beyond where they should be.

Too many of the maturing loans were granted under easy money conditions and bigger amounts of leverage than are typically available at the present. Deals that need refinancing often make no financial sense because of the amount of capital needed to get new financing is prohibitive.

That is why the news on reduced funding for CRE is worrisome. Third quarter private real estate fundraising of $18.2 billion plummeted by 71% compared to the $63.4 billion of Q2, according to Preqin dataquoted by Bloomberg. Global property transactions fell from $31.9 billion in the second quarter to $26.9 billion in the third.

As the Wall Street Journal noted, CRE lending is at “historically low levels.”

“There is liquidity available,” James Muhlfeld, managing director at Eastdil Secured, told the Journal. “But it’s likely going to be more expensive, with lower leverage and with a different lender.”

All this raises the question of which projects will be able to afford refinancing — and if they can’t, who will be left holding the bag for the mortgages on those properties.

 

Source:  GlobeSt.

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