The US multifamily market is in a dynamic stage, but on solid footing overall, according to a new report from Colliers. Though several challenges still dog the sector, the capital markets remain strong, creating ample opportunity for investors.
Colliers’ David Goodhue, executive managing director, Boston, and head of multifamily capital markets, US, says multifamily is the top target for investors. High-cost single-family homes are keeping many households as renters, and supply-demand dynamics should soon rebalance, now that the historic pipeline of the past few years has resolved.
“Investors should anticipate stronger rent growth ahead,” adds Goodhue. “Differences are emerging across asset classes and markets, providing investors multiple ways to allocate capital.”
Challenges Weigh Down Multifamily Sector
Multifamily units currently under construction have roughly halved since 2021, due to rising borrowing, construction and labor costs. Softening labor market conditions and cooling rent growth should temper the development pipeline in the near-term. Though a wide variance persists at the market level, effective rents have turned negative in recent months.
Goodhue expects the rent decline to be temporary, though he says it bears watching. He adds that if the job market pulls back, it may cause renter household formation to fall, which would weigh on demand trends.
“Normally, easing construction and still-strong demand would be driving more robust rent growth,” he explains. “Yet, with tens of thousands of units still in lease-up, landlords lack pricing power, and estimates show that year-over-year rents have declined by 1%.”
The long-term outlook is brighter, according to Goodhue, with forecasts calling for gains in the quarters ahead.
“Competition remains fierce as owners vie for renters, offering concessions and other perks to bring them through the door,” he adds.
Capital Remains Plentiful, Supporting Multifamily Investment
Pent-up, buy-side pressure is building for investors, and while capitalization rates remain around 5%, competition for assets is high. The current differing market fundamentals are allowing investors to deploy capital in a multitude of ways, including attempting to acquire assets below replacement cost.
“Rebalancing fundamentals make high-growth markets appealing, as their longstanding demographic advantages, such as strong migration patterns and broader affordability, continue,” says Goodhue.
Goodhue notes that lenders are very active in supporting new acquisitions and refinancing, with CMBS becoming an ever-larger source of debt capital. He adds that conditions are aligning for sidelined capital to jump back into the market.
Special servicers are also becoming busier, as CMBS delinquencies are rising and transitional assets are struggling to refinance at maturity. Additionally, hundreds of billions of dollars in multifamily loans are expected to mature in the coming years. Goodhue says that while most lenders are not currently inclined to foreclose on these assets, it could change over time.
Goodhue also points out that record-setting volume from 2020-2022 will require new loans or capital structures, presenting intriguing opportunities for investors. He adds that while capital sources have their sights firmly set on the asset class, providing ample liquidity, several markets still need to work through the overhang of development.
“Overall, longstanding tailwinds are expected to support the multifamily market for the foreseeable future,” says Goodhue.
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