Evidence of an Inflection Point in Multifamily Investing

The multifamily sector has faced considerable challenges over the past two years, but we recently have started to see numbers pointing toward change. Is the multifamily investment market reaching an inflection point?

Occupancy is Stabilizing

One of the most encouraging signs is the stabilization of occupancy rates. After a volatile 2022-23, occupancy has been holding steady at or above 94.1% for the past seven months, according to RealPage Market Analytics. This resilience is noteworthy because it comes alongside a 40-year supply peak in the apartment market.

Given near-term supply, I don’t anticipate rapid rent growth for the remainder of 2024 (see our Multilytics Rent Forecast January 2024-January 2025). But the fact that rental rates are stabilizing—and rents even rose an average of 0.2% over the previous year, according to RealPage, despite a major supply wave—points to robust demand.

Year-to-Date Occupancy Change, U.S. Market-Rate Apartments

Source: RealPage Market Analytics

Strong Renter Demand

Strong demand for rental units persists. RealPage reports that, for the 12-month period ended June 30, nearly 390,000 market-rate apartments were leased. That’s one of the largest absorption totals in history. Only the pandemic-era surge from mid-2021 to mid-2022, the year-ending third quarter of 2018, and the year-ending fourth quarter of 2000 surpassed the absorption figures recorded over the past 12 months.

Supply-Demand Gap for Rental Units, 2010-24

Source: RealPage Market Analytics

Apartment supply still moderately surpasses demand, although the gap is narrowing. In the past 12 months, more than half a million new market-rate apartment units were delivered, marking the highest total since 1986. With another 600,000 market-rate units expected to be delivered in the next 12 months, attention will remain focused on supply. However, strong absorption rates underscore the market’s ability to attract renters despite broader economic uncertainties.

Declining Construction Starts

While demand remains high, the pace of new multifamily housing starts has slowed significantly. According to data examined by RealPage, new starts have fallen by about 40% year over year, with 2Q 2024 recording the fewest starts since 1Q 2011. Strong absorption and decreasing new supply numbers point to a gradual reduction in the current glut, resulting in a more competitive market and higher rental rates. The typical 24- to 30-month gap between a project’s start and its delivery suggests that new supply will continue to be limited in the near to mid-term, supporting market growth.

Improving Rent-to-Income Ratios

The median rent-to-income ratio for market-rate apartments has declined for 15 consecutive months, according to a RealPage report, making rents more affordable relative to incomes. Nearly every geographic area is seeing this trend, with many experiencing rent-to-income ratios that are the lowest in three years. The fact that wages are rising faster than inflation indicates that affordability will continue to rise, supporting sustained demand for rental housing.

The Renting vs. Owning Reality Gap

Owning a home has long been a symbol of financial success, but current trends show a growing gap between the costs of renting and owning, as my colleague Dave Welk wrote in the previous Market Monitor. Average home prices have gone up nearly 50% since February 2020, and mortgage rates have more than doubled since then, putting homeownership out of reach for many and driving more people towards renting. The financial and lifestyle benefits of renting, including lower monthly payments and the inclusion of amenities, further enhance the appeal of renting over owning.

Investor Sentiment and Market Dynamics

It seems that investor sentiment, often a leading indicator of market trends, is at its lowest level in 15 years. But this could present a contrarian opportunity. Historically, low-sentiment periods have been favorable times to invest because markets are priced more attractively. Additionally, credit spreads have tightened, and optimism is growing despite the still somewhat uncertain interest-rate environment.

I am observing increased activity in multifamily sales, with more competitive bidding and higher prices in final rounds, indicating renewed investor confidence. Investment sales brokers report an uptick in listing activities. More importantly, best and final bidding is competitive again with deeper buyer pools. Eighteen months ago, bidders would often pull their offers or reduce prices in the final rounds. Today, they are submitting offers with the intention to win and are moving prices up by 5% to 15% in best and final rounds.

Distressed assets may emerge, but the situation is unlikely to mirror the 2009 scenario where notes could be purchased from banks at substantial discounts to replacement cost, even if interest rates remain steady or return to 5%. I expect this distress cycle to be brief, yet opportunities for acquiring higher-quality deals at roughly 20% below replacement cost, with flat to slightly positive leverage, are beginning to appear. This marks a shift from the period before the Fed tightening cycle, when multifamily assets were trading significantly above replacement cost.

CBRE reports that going-in cap rates, exit cap rates and unlevered internal rate of return targets for prime multifamily assets were essentially unchanged for a second consecutive quarter in Q2, likely due to expectations that the Fed will cut interest rates this year. This stabilization follows quarterly increases in all three metrics due to rising interest rates beginning in early 2022.

Last week, the National Multifamily Housing Council released its latest Quarterly Survey of Apartment Market Conditions. It revealed a mixed outlook for the multifamily housing sector, with some indices showing improvement while equity raising remains challenging. This could indicate a favorable time for investment while equity is still on the sideline. Summarizing key index results:

Market Tightness Index: Rose to 47, signaling looser conditions for the eighth consecutive quarter. Although half of respondents reported conditions were unchanged, 27% observed a loosening market.
Sales Volume Index: Rose to 57, marking a second straight quarter of increased deal flow. Thirty-two percent of respondents noted higher sales volumes, indicating a rebound from earlier declines.
Debt Financing Index: Improved to 63, reflecting more favorable borrowing conditions. This uptick aligns with a slight easing in inflation and a cooling labor market, leading to a 25-basis-point drop in the 10-Year Treasury yield over the past three months.
Equity Financing Index: Remained at 49, just below the breakeven point, highlighting ongoing challenges in equity sourcing. Sixty percent of respondents saw no change in availability compared with the previous quarter.

Macroeconomic Support and Potential Rate Cuts

Softening inflation and weaker job indicators are prompting calls for monetary easing. In June, the Consumer Price Index fell for the first time since early 2020. Policymakers are paying attention, and interest rate cuts might be on the horizon, reducing borrowing costs and boosting investment returns for the multifamily sector. With occupancy rates stabilizing, strong renter demand, declining construction starts, improving affordability and growing investor confidence, the multifamily market is showing several green shoots.