In a recent conversation in this video, show host Michael welcomes Carl Whitaker, Director of Research and Analysis at RealPage, to discuss the current state of the multi-family market in the United States. The conversation delves into the impact of economic shifts, rising interest rates, and changing tenant demands on performance valuations. As the economy evolves and work-from-home trends recede, the discussion sheds light on key factors influencing the multi-family landscape.
Economic Shifts and Leasing Activity:
Carl highlights the ongoing economic shifts, particularly the increase in interest rates. He notes that while there’s a tapering off of front door demand (newly signed leases), backdoor demand (renewal conversions) remains elevated. The dynamics of where the demand is coming from are evolving, with some markets experiencing slower front door traffic.
Impact of Rising Interest Rates on Multi-Family:
The conversation explores whether rising interest rates benefit multi-family, given that higher rates may dissuade people from buying homes. Carl acknowledges the potential positive impact but emphasizes that it primarily affects higher-end rental properties (class A and above). The majority of the multi-family market, particularly class B and class C, remains relatively insulated from such fluctuations.
New Lease Demand and Affordability Concerns:
The discussion turns to the reasons behind the slowdown in new lease demand. Carl attributes it to the rapid increase in new lease rents over the past year, making it economically sensible for many renters to stay in their current residences. Affordability concerns also play a role, with some renters choosing to stay put amid inflation and economic uncertainty.
Multifamily Occupancy and Rental Rate Trends:
Despite the changes, the multi-family market maintains solid occupancy rates, hovering in the upper 96th percentile nationally. Renewal rates continue to accelerate, and while new lease rates are still increasing, there are early signs of a potential leveling off. Carl anticipates some moderation in rent growth and occupancy rates in 2023 but doesn’t expect a significant deviation from initial forecasts.
Factors Influencing Multifamily Cap Rates:
The conversation explores the compression of cap rates in the multi-family sector. While cap rates continue to compress modestly, there’s a slowdown in transaction volume, suggesting a potential impact on cap rates in the future. Carl expects cap rates to remain tight but anticipates a less rapid compression in the coming months due to economic uncertainties.
Looking Ahead and Investment Opportunities:
As the discussion concludes, Carl provides insights into potential investment opportunities. He emphasizes the competitive landscape and the attractiveness of markets that were once considered secondary but have now gained prominence. Additionally, the class B to B plus space is highlighted as a potentially stable and insulated investment option.
Infrastructure Planning for Electric Vehicle Charging:
The conversation touches on the emerging trend of developers planning for electric vehicle charging stations as part of future amenities. With the rising prominence of electric vehicles, developers are considering how to incorporate charging infrastructure into their properties.
Conclusion:
Navigating the multi-family market in 2024 requires a balanced approach. Observing market trends, being watchful of inflection points, and staying informed without overreacting are crucial. The multi-family sector remains resilient, with ongoing changes in demand drivers and economic factors shaping its trajectory.