Over the past 2 years, the multifamily real estate market has been shaped by a number of historically unprecedented factors which have caused dynamic shifts for investors and other real estate professionals. Last year, the industry saw a large reduction in transaction volume coupled with some uncertainty amongst a portion of investors many of whom were bullish at the height of the market mere months before. Now that the FED has signaled a pause in interest rate increases and even hinted at as many as three decreases this year, many are wondering if now is a good time to invest. In order to answer this question we must first review what has happened over the past few years in order to understand where we are today and what the most prudent investing decisions are going forward.
Where have we been?
The abnormal multifamily market behavior began during the COVID shutdown when many investors feared non-payment from jobless tenants and lenders began requiring large reserve holdings in order to fund deals. The FED responded to these situations by slashing rates to all time lows in order to motivate investors to continue transactions in the market. However, these low rates combined with enormous amounts of money that was injected into the economy trigged inflation that reached forty year highs. This high inflation caused expense problems not only for apartment owners, but also for other business owners and everyday Americans. The FED then responded with an opposite reaction and began quickly increasing rates in an effort to restrain and lower inflation. This created problems for investors looking to purchase properties, but more importantly it created strain for investors with floating rate debt.
Where are we now?
Coming off of an unexpectedly rapid interest rate hike, many investors with floating rate debt now find themselves in a difficult situation. Continue to hold out and make interest payments (or buy expensive rate caps) until rates are lower or sell at a loss due to lower valuations in the current economy. This opens opportunity for buyers looking to purchase properties at a discount. Meanwhile, would be sellers of stabilized properties wait at the sidelines for rates to reduce just enough so they are able to exit at an acceptable price point.
Where are we going?
Given everything that has happened, there are a couple noteworthy opportunities of which active investors can take advantage. First, deals that are distressed due to high interest rates offer investors the opportunity to buy at a discounted valuation. While this discount has not typically outweighed the burden of high rates to date, now that rates are coming down some and sellers are experiencing more distressed we will likely see this gap close quickly resulting in a higher volume of transactions.
Second, deals that have assumable loans can allow buyers to take advantage of yesterday's rates today in this high interest rate environment. Often times, these deals are leveraged so low that even with the low interest rate they do not produce the returns investors desire. However, there are some deals with enough leverage to allow a new investor to purchase the property and the execute a solid value add business plan.
At Apogee, we believe that this year will provide more investing opportunities than we have seen in the previous two years. We are actively perusing deals that make sense in order to provide investors with opportunities that meet their criteria.
There are many important considerations when evaluating a multifamily deal and we make it our mission to careful vet each of these items. If you would like to learn more about passively investing in multifamily with Apogee, please schedule a call with us through our Calendly link.