In a testament to how brutal the year has been, only two multifamily markets have produced positive total returns in the last 12 months, according to a new report by Newmark: Fort Lauderdale and Miami at 0.7% and 0.3% respectively, helped by 4.0% income growth. Appreciation declined but West Coast markets like Los Angeles, San Jose and San Francisco all showed double-digit total return losses.
At the same time, the multifamily market is experiencing a pricing reset, just like the rest of the CRE family of assets.
Cap rates have gone up 90 bps Y-o-Y. The two cities that experienced the least expansion were Columbus at 82 bps and Louisville at 83 bps. In contrast, Baltimore has experienced the greatest expansion with 114 bps.
But where there is pain, there is also opportunity – at least for other investors.
Dry powder at closed-end funds has increased by 11% since the start of this year. The increase, according to Newmark, is attributable to continued growth in value-add funds and a sharp increase in dry power at opportunistic vehicles, which reverses a multiyear decline. These are offsetting declines in dry power at debt and distressed funds. Record fundraising by opportunistic funds in this year’s second quarter appears to have pushed the increase as investors plan to take advantage of asset repricing.
The $219 billion in dry power raised for equity investments—but not for debt strategies—equates to a leveraged purchasing power of $488 billion. That uses a 55% loan-to-value ratio. Newmark estimates that more than half of this capital is targeted at multifamily assets with most of the remainder focused on industrial assets. The capital targeting office and retail assets is quite small by comparison.