Multifamily Feels Pressure on Loans and Increased Inventory

To understand the concerns over multifamily, all it takes is a stroll through the numbers in Newmark’s 2024 Q1 United States Multifamily Capital Markets Report. Inventories and operating costs are up, rent growth is negative, and $669 billion in loans, many “in a very different environment than when they were originally issued,” will mature from 2024 to 2026.

But countervailing trends will slow a flood of competition and increase the critical role apartments play in national housing, and the increased demand that will help absorb the excess.

“New supply continues to break records as 135,652 units were delivered in the first quarter of 2024, breaking the previous largest quarterly sum in the fourth quarter of 2023,” Newmark wrote. Vacancies have grown for the ninth consecutive quarter, reaching 5.9%. “Meanwhile, quarterly rent growth declined to negative 0.1% in the first quarter of 2024, while year-over-year growth remained flat at 0.2% for the second quarter consecutively.”

New deliveries are expected to accelerate during 2024 through the third quarter. But eventually, they will likely slow in the fourth quarter, “where a reversion to the mean is expected.” That will be of critical import to the multifamily industry as economic pressures continue to keep consumers from buying homes. The monthly spread between homeownership and rentals reached $824, an 18.4% year-over-year increase. No wonder mortgage applications for home purchases are at a nearly 14-year low.

Even as deliveries were up, so was demand. In 2024 Q1, 103,826 units were absorbed, the “largest first quarter total since 2000.” It was 2.7 times larger than the long-term first-quarter average of 38,005. If demand remains hot and deliveries drop, excess units will be consumed and downward pressure on rents will ease. That will be important given that multifamily operating expenses were up 6.5% year over year, including a 36.1% increase in insurance costs.

As for transactions, debt originations fell to their lowest point since 2015, representing higher financing costs as well as lower transaction volumes. “While recent activity has been lackluster compared to pre-pandemic levels, originations in the first quarter of 2024 were down just 7% year over year, suggesting that activity may be close to bottoming,” Newmark wrote.

An upcoming wave of $669 billion in multifamily loans maturing between 2024 and 2026 will present a challenge to the market. Without lower interest rates, many owners won’t find refinancing, nor will they probably have the additional equity they can, or will, put into a property. Multifamily investment sales in Q1 were $20.6 billion, down 25.3% year over year.

Investors might look to secondary and tertiary markets for near-future purchases. The spread between major and non-major market cap rates were 25 basis points because of “lower barriers to entry, favorable demographics, and strong demand fully compared with major markets, which are more supply constrained.”