Slowing Rent Growth Pressuring Apartment Financing, Operations

The recent move to stable and even falling rents in many markets is affecting multifamily investment and those who operate apartment buildings.

Buyers could find challenges when working with their lenders, and given inflation now rising faster than rents, landlords are in a unique situation compared to recent run-ups.

Jamie Berenger, chief credit officer, A10 Capital, tells GlobeSt.com that the multi-family sector, viewed as a safe haven for real estate investment, has seen a disproportionate amount of capital invested over recent years relative to other asset classes.

“Increased levels of capital chasing transactions resulted in buyers having to assume significant, ongoing rental rate growth to make deals ‘pencil,’ ” he said. “A decline in rent growth forecasts, should they come to fruition, may result in prolonged, or in more extreme examples, and missed business plans.

“Especially on transitional assets secured with bridge debt, a lack of rent growth will put pressure on stabilized (takeout) metrics which will create a disconnect between lenders and borrowers in the future.”

Increase In Expenses Outpacing Rents

Gary Bechtel, CEO, Red Oak Capital Holdings, tells GlobeSt.com, “We are going to continue to see a cooling in the multifamily market, even in the areas that were overheated in 2022 (Florida, Tennessee, Nevada, Arizona, etc.).

“Rents and sales activity will continue to soften as the economy continues to feel the impact of inflation and as interest continues to rise, which I believe will likely continue into the third or fourth quarter before the Fed begins to taper,” Bechtel said.

“It’s my opinion that we are already in the front end of a recession, especially when you look at benchmarks such as a flat/inverted yield curve, long-term U.S. Treasuries exceeding 3.00%, and at last two-quarters of negative growth.

“Inflation will likely have an upward pressure on operating expenses, possibly impacting property values if the landlord is unable to pass these along to tenants as increased rental rates.

“This is the first time in many years where in some cases the increase in expenses is outpacing that of rents, resulting in negative NOI growth. As sales begin to fall, you may also see capitalization rates increase, potentially further depressing values.”

Rent Growth Forecast Downgrades

At least two apartment rent analyst firms recently downgraded their forecasts for 2023, GlobeSt.com reported this week.

RealPage has downgraded its 2023 forecast for effective asking rent growth to 3%, with rent movement varying materially by asset class and by submarket.

Yardi Matrix has revised downward its apartment rent forecast for 2023 to 3.1% from 3.5% and expects to see all that growth in the first two to three quarters of the year.