AS AN INVESTOR, DO YOU PLAN TO BUY, HOLD OR SELL IN THE MULTIFAMILY ASSET CLASS IN 2023?

With the series of activities that have been unfolding since after the pandemic; the highest inflation since years ago, an increase in construction materials cost, and other factors. It is important for you as an investor to note if you plan to buy, hold, lease or sell in the multifamily asset class in 2023.

Investing in real estate can be a great method to build a lot of wealth right now in 2023. Think about real estate as a long-term investment as the housing market is currently out of control. Not only are property prices rising across the board, but mortgage rates have reached their highest level in almost a decade. 

Multifamily rental properties are a much more difficult asset class to penetrate due to the complexity of the buyers you’re up against. Not to mention a more sophisticated capital structure, strict underwriting, and the many moving pieces needed to close and operate a building. 

Let’s examine each one separately. While some owner-occupied multifamily properties, most are acquired to make money. As a result, their pricing is influenced more by the rental income they produce than by market conditions as a whole. As a result of these factors, the price stability of multifamily housing is higher. Multifamily houses tend to sell for lower multiples of their rental income than single-family homes.

Multifamily houses naturally produce a variety of rental streams, which might be especially appealing to prospective investors. Consider it this way: if you acquire a triplex and one unit remains empty, you’ll still get two-thirds of your revenue. If your single-family home is vacant, you receive nothing.

After two exceptional years of performance, multifamily rent growth began moderating in the fall of 2022, a trend that will be followed into 2023 as housing demand and economic growth weaken. The U.S. economy enters the year in good shape with respect to many measures, but all eyes are on interest rates and how quickly inflation recedes. Economic growth will likely wane in the second half as the impact of rapid rate hikes takes effect.

Multifamily rent growth will be closer to its historical average in 2023. Nationally rents increased by 6.4% in 2022 after year-over-year growth peaked near 16% earlier in the year. This year we foresee rent growth dropping in half to 3.1% as demand lessens and deliveries remain high. Factors that drive demand include less migration, fewer new households, and declining affordability.

The robust pipeline of projects under construction will ensure a sizeable number of deliveries. Our forecast calls for 440,000 new deliveries this year, an increase in the stock of 2.9%. Deliveries will be concentrated in fast-growing markets, including Dallas, Austin, Miami, Houston, and Phoenix. However, starts will reduce due to rising construction costs, the shortage of construction workers, and delays in the entitlement process.

Transactions and pricing will significantly subside due to the increase in mortgage rates and projections of slower rent growth. Pricing uncertainty amid the rising cost of capital has created a gap between buyers and sellers, with investors cautious although multifamily remains in demand relative to many other property types and products. We expect property sales will be slow at the beginning of the year. When and how much sales recover will depend on the economy and mortgage rates.

Debt availability will be constrained in 2023, with lenders acting with a significant amount of restraint. Lenders will focus on lower leverage, with an emphasis on debt service coverage. Fannie Mae and Freddie Mac remain active, in line with their mandate to provide liquidity to the market, but they have had their allocations reduced. Banks, life companies, securitization programs and private equity funds all have constraints that will limit activity relative to recent years.

Investors should have plenty of money put aside to act as a buffer of sorts.  Once an investor has scaled out to a larger portfolio of properties, it is important to have enough cash on hand to rehabilitate 10 to 15 percent of those properties every year. Be prepared, plan for the best, but prepare for the worst.

CONCLUSION

In commercial real estate, once the market begins to bounce back, investing in multifamily property likewise turns into an all the more engaging thought, either as a profession or an awesome side job. Like any other undertaking, however, there’s a correct way and a wrong approach. Successful investors aren’t made overnight.

It’s not easy to succeed in commercial real estate investing. Getting lucky on one investment does not amount to becoming a successful real estate investor. The only way to become a successful investor is to educate yourself and follow the path of successful real estate investors who have already made it there.

 

As informed investors we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.