Is the Market Signaling a Bottom for Multifamily Valuations?

Over the past several weeks, a wide array of indicators—from broader investor sentiment to Federal Reserve policy statements to improving capital flows—appear to be coalescing around a central theme: a possible market bottom for multifamily valuations. After a challenging year and a half, this would provide welcome relief as valuations in other segments, including public equities and even cryptocurrencies, have extended their rallies. For more perspective, we evaluated three indicators that seem to be marking an inflection point: the NMHC Sentiment survey, recent Federal Reserve comments, and capital flows into the private REIT market.

Sentiment Survey: Increased Availability of Debt and Equity Capital

The National Multi Housing Council’s Quarterly Survey of Apartment Conditions, which I cited in an earlier Market Monitor, provides a great benchmark for broader investor sentiment. Part of the beauty of this index is its simplicity and subjectivity: only four questions for survey participants on whether market conditions surrounding sales, operating fundamentals and availability of debt and equity are either improving or weakening. In the latest survey from January, respondents noted that, while fundamentals are still looser (read: either declining or about the same as three months ago), the perceived availability of debt and equity capital marked a significant uptick from the October 2023 survey. These represent the highest readings since January 2022 for equity capital and the highest for debt capital since the prior peak of July 2021. While occupancies and rental rates may still be challenged due to elevated supply, these stronger sentiment readings were a welcomed pivot in the marketplace.

1Q 2024 Sales Volume, Market Tightness Indices

Note: Survey responses reflect the change from the previous quarter. A market tightness index reading above 50 indicates that apartment markets are getting tighter; below 50 is looser. A sales volume index reading above 50 indicates that sales volume is increasing; below 50 is decreasing.
Source: National Multifamily Housing Council

Federal Reserve: Market Expects Interest Rate Declines

The dramatically increased sentiment for availability of debt capital came on the heels of the December Fed meeting where Chairman Jerome Powell proclaimed that the unprecedented interest rate hikes were likely coming to an end. The majority of Fed policymakers further indicated that 2024 would bring a series of rate cuts amid signs that inflation is under control. With the end of the first quarter approaching, rates have not yet been cut. However, given recent comments from the Fed, market expectations still call for three 25-basis point reductions in the Federal Funds Rate, with the first expected in June. Although the bond markets appear to have already priced in these cuts, the first heralded cut likely will spur investors into action and force many capital allocators off the sidelines.

This influx of capital will stabilize price declines. According to MSCI Real Capital Analytics’ Commercial Property Price Index (CPPI), December broke the 16-month string of declines in the multifamily price index: Multifamily prices are now 15% below the July 2022 peak but remain 19% above pre-COVID pricing in January 2020.

Private REITs: Investor Sentiment Turning

With broader price stability in sight, the uptick in capital flows into the private REIT market rounds out signals that multifamily price declines could be headed for a reversal. Over the past several quarters of share-price declines, many of the largest private REIT managers have been dealing with an onslaught of investors looking to redeem their shares. In a March letter to shareholders, Blackstone’s $60 billion-plus BREIT—by far the largest in the industry—announced that it has fully satisfied its redemption queue for the first time since November 2022. Investor sentiment does appear, at least in this instance, to be turning into action.

As noted by other market participants, institutional capital, notably pension funds, endowments and other large managers, has returned to allocating capital to commercial real estate, likely for two reasons: First, apparently favorable valuations, and second, to rebalance portfolios skewed by gains in other investment sectors. Private capital, on the other hand, is returning more slowly to the market. However, the institutional capital flows that are helping to stabilize private REIT redemptions could be a harbinger for private capital.

In addition to closely monitoring empirical transactional data, we are constantly searching for market signals of the inevitable uptick in valuations. If the Fed delivers on one or both of its dual mandates of price stability and maximizing employment by June and starts reducing rates, a bottom for valuations could come into clear focus. That said, if “higher for longer” is required and the Fed maintains elevated rates, expect further value declines and a longer slide to the bottom. Until then, I’ll have my “Team Fed” jersey on, cheering for those June rate cuts.