'Enormous' Amount of Capital on Sidelines Means Now Is Time to Buy Multifamily

With strong fundamentals, new construction starts and a sizeable amount of capital on the sidelines, “now is the right time to buy” in multifamily, according to John Sebree, senior vice president and national director, Multi Housing Division, at Marcus & Millichap.

Speaking in a recent news video by his firm, Sebree said, “Occupancy remains very high, rent growth continues to be very strong, and we’re dealing with a housing shortage in this country and there has been an unprecedented amount of new deliveries that have been coming to the market over the past couple of years.”

From Q4 2022 through Q3 2023, new multifamily starts have dropped by over 50%, Marcus & Millichap points out.

“So, as we move forward, vacancy rates, which have increased a little bit because of the new units being delivered, could increase another percentage point or two,” Sebree said. “But once that gets absorbed, there’s not much coming behind it. So, that pendulum is going to swing back, putting further upward pressure on rents.”

Sebree said the most important factor is that there is an enormous amount of capital on the sidelines right now. And this capital is waiting for the right time to jump back into the marketplace.

As Lloyd Blankfein, former chairman and CEO of Goldman Sachs stated on a recent Marcus &  Millichap institutional property advisors national webcast, “If you’re sitting by the phone, waiting for it to ring so someone can tell you the market has hit bottom, it will never ring.”

“Now is the time to be preemptive,” Sebree said. “It’s time to analyze the market, understand what exactly you want to go after, and then go after it very, very aggressively.”

He said there’s a limited number of deals that are coming to market at this time, but that will likely change based on all that capital on the sidelines.

“As that capital starts coming into the market, it’s actually going to be more difficult for people to get deals done just because of the amount of competition that is going to be going after every single deal,” he said.

Sebree’s conviction is based on what he’s hearing from investors, he said.

For those investors who are ready to enter, he said they must first determine what their cap rate is going to be.

“Maybe it’s a five and a half, maybe it’s a six,” Sebree said. “But it’s probably not gonna be a seven in today’s market.

“You have to understand exactly where interest rates are, agency debt, or bank debt, and you’ve got to keep in mind that you may have to underwrite negative leverage for a short period of time.”

Once an investor’s parameters are set, and once an investment strategy is in place, “You’re going to have to be very aggressive on any property that comes within that zone,” Sebree said.

He added that property management is playing a more crucial role than ever in this current environment of higher expenses.

“Making sure that you have an efficient property management operation is going to be critical to maximizing values,” Sebree warned.