Despite Rising Rates, Multifamily Investment Continues Its Wild Tear

Even as interest rates rise and inflation pressures deals, the multifamily sector remains strong, with occupancy rates remaining high and rents staying relatively solid.

Overall, supply and demand for the asset class remains out of balance: asking rents for existing units are up 12.6% year-over-year through July, and the US is currently estimated to be at a 600,000-unit apartment shortage, according to the National Multifamily Housing Council and the National Apartment Association. Yardi Matrix data shows that occupancy sits at around 96% nationally as of June 2022.

Lending also remains active in the space, with commercial and multifamily mortgage loan originations increasing 19% year-over-year in the second quarter, according to the Mortgage Bankers Association. While the pace of borrowing and lending backed by CRE slowed from the first quarter of 2022, it still set a quarterly record from April through June. Multifamily originations were up 24% year-over-year in Q2.

Investment funds focusing on multifamily are continuing to jump in on the action: on Thursday, Dallas-based Lion Real Estate Group, LLC announced the closing of its latest multifamily fund at more than $200 million. LREG Multifamily Fund II will focus on acquiring value-add multifamily real estate across the Sunbelt, the company said in a statement. It follows the close of the real estate investment firm’s Marble Partners Fund I LP, which acquired over $500 million in real estate across 15 assets encompassing 3,503 units.

Rising interest rates and inflation are leading some multifamily assets to trade at as much of a 20% discount, according to Mory Barak, Co-Founder and Managing Principal of LREG.

“The overall health of this sector is very strong, with higher occupancy rates and lower rent volatility than other real asset classes,” Barak says. :We feel very well positioned to continue executing on the strategy that has served us and our investors well for over 15 years.”

Earlier this spring, multifamily investment firm Gray Capital launched an anticipated $100 million equity fund to acquire large apartment communities located in the Midwest. At the time, the firm said the Gray Fund would seek to purchase $300 million of multifamily complexes over the next three years in stable Midwestern markets like Indianapolis with a hold period of up to 10 years. And in June, Infinity Investment Group and A9, a family office, announced the formation of a $250 million investment fund targeting multifamily value-add assets of Class A, B, and C multifamily properties across 20 US metros.