5 Reasons the Multifamily Market Might be Back

Watch out vultures, here comes the money train

I've been skeptical about multifamily prices stabilizing, which has seemed a little premature.

But I may be coming around.

Despite loud concerns about syndication shops blowing up and an impending flood of distress, prices seem to be stabilizing around much of the country.

Could there still be another shoe to drop? Of course, but that no longer seems to be the base case.

So let's dive into the numbers and see what story the data tell.

CoStar MF cap rate data (which I refer to affectionately as "consistently unreliable but directionally accurate" ) shows broad stabilization across major US Metros.

Source: CoStar data, my analysis\

Drilling down on Dallas for example, Q3 2024 is on track to be the first quarter since 2022 where cap rates have not expanded. Which is encouraging.

So what's driving the healing of a market that's been through the tumbler for the past four years?

First, lenders are applying lessons learned from the Great Financial Crisis and being more flexible with struggling borrowers. Rather than rushing to foreclose and pushing properties to market, which torpedoes prices, they are "extending and pretending," to buy both sides more time.

There are exceptions of course and we have seen some deed-in-lieu transactions and distressed sales, but the "wall of maturities" has not materialized into a flood of sales.

Second, weakening economic data have pushed the Federal Reserve into a more dovish stance, further encouraging owners and their lenders to hang on with the hopes of lower rates right around the corner.

This not only reduces the distressed inventory on the market, but cheaper debt helps buyers get more aggressive and in some situations are starting to see positive leverage opportunities.

Third, managers of the massive investment funds raised in the wake of the pandemic to capitalize on distressed opportunities are starting to get itchy.

We've already seen a couple huge institutional transactions this year, including KKR buying 7,000 apartments from Lennar's apartment building division, Quarterra Multifamily for around $2 billion in June 2024.

With less distress available on the market, buyers are dialing in their models to justify the deployment of capital.

Fourth, investors are looking forward a few years to when expected new deliveries of apartments are expected to drop off a cliff, thinking this could buoy rents.

Indeed, high cost costal markets and other more supply constrained areas are already seeing rents stabilize and creep back up, emboldening the narrative that good times for apartment owners could once again be right around the corner.

Fifth, demographic shifts and preferences of younger generations to be more transient is driving demand for rental housing more generally. With home prices around all-time highs when measured by income and Generation Z bearish on having kids, rental living is looking appealing by comparison.

There are of course, some flies in the ointment and burgeoning optimism could in fact end up being a little premature.

According to real estate data provider Trepp, multifamily delinquencies are now at a 3-year high, having drifted higher in the past few months even as default rates in other asset classes have remained flat.

Source: Trepp

If trend this picks up speed, lenders could get overwhelmed by a ballooning book of bad debt and become more motivated to unload assets.

There is no shortage of buyers eagerly awaiting this to play out however, which should dampen concerns of an all-out collapse.

Also, equity and real estate markets are both in the odd position of quietly rooting for economic weakness so the Fed is pushed to lower rates quicker than expected. Which of course is a dicey thing to wish for if the fundamentals of your asset class rely on people being employed with enough money to pay their rent.

But perhaps the best arbiter of this debate may be the market itself, with the share prices of big apartment REITs having been on a run in 2024, despite the perception of broad weakness in the market for the underlying properties.

Avalon Bay, which develops and owns many high end apartment communities in urban areas, has seen is share price come within sniffing distance of its 2022 highs.

and more pedestrian competitor Equity Residential has also seen a nice rally in the past 12 months.

In the end when real estate investors look out across their spectrum of options in today’s market, multifamily might be their least bad option.

Which could just be good enough.