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What Housing Market Moves Suggest for Multifamily | Margin Management: A Battle of Percentages

Market Monitor

What Housing Market Moves Suggest for Multifamily

Dave Welk, Managing Director of Acquisitions

With 30-year mortgage rates hovering between 6.5% and 7%—the highest in more than two decades—transaction levels and values of single-family homes in the U.S. have declined significantly since the post-COVID peak in mid-2022. The declines have been noticeably severe within the entry-level segment and in the North and West regions. According to a report by the National Association of Realtors (NAR), existing home sales fell 0.7% in January to a seasonally adjusted annual rate of 4.0 million units, the lowest since October 2010 and a 36.9% decline from the prior year. This marked the 12th straight monthly sales decline, the longest such stretch since 1999.  

30-Year Fixed-Rate Mortgage Average in U.S.

30-Year Fixed-Rate Mortgage Average in U.S.

Source: Freddie Mac via St. Louis Federal Reserve

Despite these somber headlines, there are rays of hope. Shortly after releasing the report mentioned above, the NAR released another report on pending home sales, a forward-looking indicator of future home sales based on contract signings. It noted that January represented the second consecutive month of increases in this metric.   

Homebuilders have gotten creative to bolster renewed activity among buyers. According to a survey by John Burns Consulting, “75% of nationally surveyed homebuilders confirmed they are buying down buyers’ mortgage rates to make payments more affordable.” This has helped spur a significant recent uptick in demand for stagnant new-home inventory that was unaffordable for buyers from a qualification standpoint. According to the survey, nearly a third of homebuilders utilizing this strategy are contributing 5% to 6% of the home purchase price upfront to lower the 30-year mortgage rate, typically by 1% to 2%. This rate reduction is temporary—often only two to three years—before rates increase back to the underlying rate.   

If this incentive sounds eerily like the adjustable-rate mortgages that helped trigger the Great Financial Crisis, you would be somewhat correct. Under today’s more stringent standards, borrowers for these mortgages must qualify for the highest payment under the fully adjusted rate, with the upper limit fixed at about 6.5% rather than floating rates of 8% to 10% before the crisis. Given the rapid increase in interest rates, the prospect of a reduction in mortgage rates over the next several years appears probable; once these “teaser” rates expire, these homeowners could refinance into a lower fixed-rate mortgage. 

Over the past 60 days, in our Sunbelt and Mountain regions, we have heard that these strategies are paying off and that existing inventories of completed homes are dwindling, spurring homebuilders to consider ramping up production after a slowdown in Q3 and Q4 of last year.    

If these trends continue, what could this mean for the multifamily market? We believe three areas could be impacted: 1) A likely reduction in the number of opportunities for investors to purchase homebuilders’ existing inventory and convert them to build-for-rent (BFR) units; 2) possible price increases for materials also utilized for multifamily projects such as lumber, drywall, appliances, etc.; and 3) continued pressure on multifamily rental rates due to these homebuyers ultimately not entering the rental pool. 

While we still anticipate seeing a few BFR acquisition opportunities from some smaller and regional homebuilders, we believe many of the nationals in our markets will continue utilizing rate buy-down tactics to spur demand. The National Association of Home Builders (NAHB) anticipates that multifamily construction starts will fall by 28% this year due to challenges in multifamily labor and material costs. This significant reduction in new supply (not to be confused with the already-built new supply that is delivering this year) could ease pressure on cost increases if homebuilders begin returning to prior production levels. We are already accounting for negative multifamily rent growth across our markets this year, as recently highlighted in our MultilyticsSM Rent Forecast report.   

While strengthening fundamentals within the housing market could translate to reduced BFR investment opportunities, near-term cost increases and additional pressure on multifamily rents, a healthy and vibrant housing market is essential to a strong underlying U.S. economy.   

Margin Management: A Battle of Percentages

Aaron Maas, Vice President of Multifamily Operations

In 2023, multifamily operating expenses are facing a host of challenges including rising inflation and negative rent growth—all of which can erode margins if not effectively managed. Employing creative solutions during this period to control expenses while increasing resident retention is critical to keeping operating margins in the black

Year-Over-Year Change in Expense Per Unit, 2022 vs. 2021, Select Categories

YOY change in expense per unit

Source: Real Page

 Insurance: Seeing the spike in the chart above should drive anyone in pre-development to consider insurance a key influencer of design and material. The spike in costs follows directly behind increased construction costs for new buildings. Communities in development can lower risk through design, such as firewalls, and even location and asset selection. Managers and owners are approaching insurance brokers with portfolios versus individual properties to leverage scale and lower expenses. 

Turnover: A vacant space is an expensive space. In multifamily, the unique relationship between the product—the customer’s home, workplace, play space and largest monthly expense—means service is key. Mitigating the expenses incurred in preparing a vacant unit for a new resident starts with resident retention, and the use of technology that can identify customer pain points is critical. Artificial intelligence platforms that bubble up concerns to on-site teams can increase customer satisfaction and lead to more positive online reviews, all while returning work hours back to the leasing team.  

Utilities: The cost of utilities is increasing even as appliances and fixtures become more efficient, and smart managers are conserving and monitoring energy use. Controlling a vacant unit’s utilities with smart-home devices helps reduce the owner’s bill, and installing submeters with minute-by-minute connectivity immediately identifies energy peaks. Sensors and utility aggregators can also call out energy leaks and failing systems, leading to earlier repairs and a reduction in replacement costs. 

Administrative, operations and maintenance: The new generation of residents demands more virtual access to their homes and tech-forward ways to find new ones. Leasing bots, self-guided tours and apartment complex apps help residents find, lease and live in these communities on their own terms. These costs aren’t going away; successful vendor partners must adapt and future-proof a community as new amenities such as electric vehicle charging stations evolve.   

Payroll: Payroll, trailing the list of recent increases, has been growing for a decade. At the 2023 TechConnect Conference, dozens of key operators lamented that on average they have an open position on the property almost 20% of the year. Finding and retaining key employees such as maintenance technicians from a small labor pool means not just making competitive employment offers but managing their timecards effectively. New mobile-friendly service request programs manage parts inventory and can reduce the back and forth among shop, customer and management, with features including video and image sharing of problems and resolutions, and digital project status updates. Less physical oversight and implanted quality control increases efficiency and decreases repair time. As forward-thinking apartment communities shift from phone call to app, leasing and maintenance teams endure fewer administrative duties and can focus on the customer experience. Smaller staffs—or even no on-site staff—may not be far down the road.  

Marketing: Submarket competition, advertising costs and leasing demand ebb and flow on a monthly basis. Top-performing digital marketing providers can provide dynamic offerings that adjust to the property’s needs, turning off an expense when the perfect balance of occupancy and retention is found.  Other tech platforms adjust rental rates daily, anticipating turnover, seasonality and competition.  

While inflation is affecting every industry and household, multifamily includes almost every category in the account tree. With expenses rising in almost every category of asset management, multifamily operators must develop a systematic approach to adopt and pilot technology to raise quality and reduce costs.   


This article is intended for informational and educational purposes only and is not intended to provide, and should not be relied on, for investment, tax, legal or accounting advice. The information is provided as of the date indicated and is subject to change without notice. Origin Investments does not have any obligation to update the information contained herein. Certain information presented or relied upon in this article may come from third-party sources. We do not guarantee the accuracy or completeness of the information and may receive incorrect information from third-party providers.