Multifamily Investors Adjusting for Lower Profit Margins This Year
Higher inflation, rising interest rates and supply chain disruption headwinds are a threat.
Investors are predicting a solid 2022 for multifamily investment, but one that might include lower profit margins than 2021, according to Lightbox’s Q1 2022 Investor Sentiment Report.
As higher interest rates put upward pressure on borrowing rates and cap rates, earnings will be impacted. But David Scherer, Co-CEO of Origin Investments, said this does not mark the end of what has been a very strong multifamily market.
“Appreciation and multiples have been so strong for so long that a modest reduction has been inevitable,” Scherer said in prepared remarks.
Higher inflation, rising interest rates and supply chain disruption headwinds that threaten to slow other market sectors are prompting some investors to adjust expectations for multifamily, according to the report.
The prospect of inflation and the mark-to-market capabilities of the sector suggest rents will continue to rise as higher wages provide workers with additional spending power.
Also, remote and hybrid office trends support the need for larger and better accommodations, which is moving multifamily activity from urban developments into suburban markets, particularly in the Southeast, Southwest and other high population growth regions.
Demand Fueling More Ground-Up Construction
Given the constrained supply and strong demand, ground-up construction is expected to increase in 2022, the report also found. Fundamentals provide a favorable debt and equity climate which translates to significant capital in search of investments.
Many investors who have focused on value-add assets see continued opportunities and the need to adjust the approach.
“Historically, you could focus on basic unit interior renovations to drive value, but today many properties have been through partial renovations having been traded multiple times over the last 10 to 15 years,” Chris Bartlett, head of capital markets at Dallas-based The Milestone Group, said in prepared remarks. “Now, you really have to touch every aspect of the property to generate value.”
Today, elements of a value-add program likely include enhancing residents’ experience, technology updates, comprehensive unit interior upgrades and driving online awareness and reputation.