Multifamily deal activity is picking up, but lurking behind the healthy market shift is a more cloudy picture. Vacancy has risen from 5% in 2021 to roughly 8.5% nationally, while rent growth has stayed below 2%. Financing conditions have also changed in ways that complicate how assets are being underwritten.
"We've had several years of high construction activity," says Richard West, EVP of valuation at AEI Consultants, "and frankly, some pretty high absorption numbers as well, although slightly below construction. We're expecting both of those to come down, but we're also expecting absorption to actually come down less. So that will introduce some stability in the market."
As the market goes through that shift, West points to several factors, such as insurance, tax projections and agency lending uncertainty, that are making appraisals more challenging. He suggests factors that investors and owners need to understand as deal activity picks up.
Rents Diverge as Deal Volume Climbs
With 485,0000 units delivered nationally last year against roughly 401,000 absorbed, vacancy is expected to ease at least 100 basis points over the next two years, according to West. Rent growth also tells a similar story.
Overall growth has remained below 2%, a trend West expects to continue through 2029. However, supply-constrained markets, according to West, are outperforming with healthy rent growth.
On the transaction side, first-quarter sales volume rose 31% year over year by dollar amount. And prices remain about 21% below the 2022 peak, which West notes is an improvement from 27% below just one year ago. He also explains that cap rates have compressed across the board, with institutional-grade assets trading in the 5% to 5.5% range and top-tier products above $300,000 per unit pushing into the upper 4% range.
SBL Wind-Down Leaves Smaller Deals in Limbo
One of the most immediate challenges in the market, according to West, is the wind-down of Freddie Mac's small balance loan (SBL) program.
"Normally, a borrower with a smaller—let's say a 40-unit type—project," says West, "would go to Freddie Mac and get an SBL quote." He adds that the past several months have brought significant uncertainty about the program's future.
West notes that, based on current bidding volume, deals that would have gone through the SBL program are likely routing to debt funds and banks instead. And despite agency loan volumes rising 90% in the first quarter, West explains that some agency clients are now reporting significantly lower pipelines. As a result, he advises investors with smaller deals to lock in their debt source now rather than assume the transition away from SBLs will resolve quickly.
When considering the future, West and his team put a 50% probability on stable pricing over the next 12 months, 35% on prices moving higher and 15% on further declines. "There's a lot of variance from market to market," he says. "So you really want to drill into whatever submarket you're working in as we move forward."
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