Multifamily Real Estate in 2024: Navigating Turbulence and Seizing Opportunities

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The year ahead for the multifamily real estate market holds a unique set of challenges and prospects. With both high interest rates and weather-related catastrophes anticipated to continue into the new year, multifamily property stakeholders in the Midwest and beyond should prepare to contend with an array of issues that could cut into their bottom lines. Savvy owners and operators will find opportunity in risk management.

Forecasting profitability

About one-third of the housing in the United States is multifamily and the average landlord owns three properties, with more than half managing their own buildings.

Since 2020, there has been an average of 700 new multifamily units built daily, which has flooded the nationwide market. As a result, a slowdown in rent growth was reported in the third quarter of 2023 of just +1.1%. This surge in new offerings, coupled with tightening access to financing, has led to a 60% drop in new construction starts within the last year.

Yet, amidst this market volatility, certain regions within the U.S. remain resilient. The Midwest has emerged as a burgeoning hub for multifamily investments. This is especially true for West Michigan’s multifamily rental market, which boasts an impressive rent collection rate that exceeds 96% — the strongest in the country.

Investors in the multifamily market are attracted to the Midwest because of its diversified economy, steady economic expansion and low unemployment rates, which has created a stable environment for real estate. Its lower cost of living and business operations compared to other regions contributes to higher rental yields, making the area a magnet for investors seeking portfolio expansion. With numerous ongoing projects underway across the region, long-term investment opportunities continue.

The forthcoming profitability prospects for multifamily real estate hinge upon location and the prevailing economic climate. Each city will have its own inflationary forces and prolonged high interest rates, anticipated to affect investor confidence. The aftermath of the COVID-19 era could witness a wave of lease renegotiations, downsizing or non-renewals, directly influencing profit margins. This impact will be more apparent across the commercial real estate market among portfolios with assets more heavily focused in the commercial office and select retail space.

Despite Michigan’s stable market indicators, economic uncertainties cast a prolonged shadow, with over 70% of real estate executives in HUB’s Executive Outlook Survey flagging economic challenges and unpredictability as the primary threats to real estate profits in 2024. This apprehension is apparent in the notable outbound migration from Michigan to other states; Michigan is ranked fourth in outbound movers across the nation.

Locally, Michigan’s demographic landscape is undergoing a shift from major urban centers to the surrounding suburbs, as seen in the growth of the top three cities in west central Michigan, particularly around the Grand Rapids area. As investors flock to leverage the region’s attractive blend of affordable living costs and consistent economic expansion, the area remains primed for sustained growth. Despite economic flux across the country, Michigan multifamily real estate showcases resilience, spotlighting Midwest markets as models of adaptability amid high-interest rates and tempered rent growth.

Adaptability as a crucial virtue

To remain resilient in 2024, real estate owners and operators should plan ahead and be more intentional about the design of their insurance programs. The real estate insurance sector should anticipate heightened costs, especially in disaster-prone regions. Escalating property values, legal expenses and a surge in severe weather incidents collectively have caused insurance rates to rise across multiple coverages.

Furthermore, insureds can expect additional underwriting scrutiny and costs related to assets located in areas with high crime scores. Whether an established asset, new build, or under construction, high-crime areas create concern for underwriters, and the need for advanced security measures. Site security and enhanced controls can be a costly investment and should be considered when budgeting.

Another consideration that real estate owners and operators should be aware of is tenant occupancy. This is another area of underwriting scrutiny that has become more prevalent, particularly with industrial properties and with portfolios with mixed-use.

Multifamily property owners and operators nationwide must prepare for difficult policy renewals, particularly concerning catastrophic peril and residential property insurance. Alternative risk financing solutions should be evaluated and aligned with insureds’ risk tolerance in collaboration with lender, investor, and partner requirements. Solutions such as integrated or structured programs, higher deductibles, self-insurance, and captives are potential strategies that could help the industry navigate current challenges.

Labor shortages and real estate dynamics

Persistent labor shortages within the real estate domain call for innovative recruitment and retention approaches. The resignation of over 50 million workers from their jobs in 2022 underscored the magnitude of turnover, as employees increasingly gravitated toward higher-paying roles with greater flexibility and growth prospects.

Recognizing the pivotal role of a well-staffed workforce, offering personalized benefits based on data and analytics could help remedy the labor shortage and foster employee engagement and productivity. However, the real estate industry is missing out on a significant opportunity to gain a competitive edge through tailored employment offerings. Just 41% of survey respondents in HUB’s report offer personalized benefits.

Crafting a robust preparedness blueprint

Multifamily real estate owners and operators that want to be sustainable need to establish a robust risk management strategy because of escalating premiums and record-breaking losses from extreme weather events. Improved risk management will be mandatory in 2024 — not only to obtain affordable insurance, but to help secure real estate businesses’ long-term economic futures.

At the most fundamental level, property owners need to make buildings safer, smarter and more resilient to extreme weather. This is particularly true for entities that want to keep insurance costs down through self-insurance or those that take higher deductibles. Water mitigation plans and emergency plan protocols for loss of offsite power, punctured roofs and active shooter events are all important to prepare.

Real estate owners and operators should prepare to prevent events that could lead to nuclear verdicts, such as residents or guests suffering injuries on their properties. Proper maintenance and site security — including cybersecurity — are crucial risk management measures for any real estate owner.

Utilizing methods of contractual risk transfer is another opportunity for operators to transfer risk to a responsible party.  This can help operators reduce the claim dollars that could potentially impact their loss experience over time.  Examples of these strategies include having an effective tenant liability insurance program/requirement and executing favorable language within subcontractor indemnification agreements.

Despite the growing importance of implementing a risk management strategy, a considerable gap exists. According to the HUB survey, only a quarter of real estate entities polled have an effective risk mitigation strategy. Proactive measures like multifactor authentication protocols, endpoint detection and recovery to combat cybercrime as well as business continuity plans can ensure seamless operations for any multifamily unit.

Make a plan for success

Real estate owners and operators must strategically plan to contend with some of the industry’s multi-faceted challenges to protect their bottom lines in 2024. Here are five considerations to help guide you:

1. Analyze past loss trends. Thoroughly review the causes of large losses to avoid them in the future. Develop a strategy that determines when and where to explore alternative markets.

• Conduct a thorough risk assessment. Evaluate all potential risks within your organization and see how they compare to your organization’s goals. Evaluating fire suppressions systems, roof quality and general property maintenance are all opportunities to showcase the quality of your asset.  Demonstrating your capital expenditure and investments, combined with overall property improvement plans, are examples that can improve your risk profile and better position Consider establishing higher deductibles to lower premiums and explore alternative risk transfer methods for comprehensive coverage.

• Prioritize building safety. Extra employee training, enhanced safety and security elements and robust risk management measures can help maintain the safety of your residents and the building and help proactively avert potential risks — and provide long-term cost savings as well.

• Engage your workforce through tailored benefits. Attracting and retaining your workforce is essential in the current labor environment. Offering customized benefits can enhance employee engagement, providing a competitive advantage while concurrently reducing overall risk.

• Be open and honest with your broker. Establish open lines of communication with your insurance broker. If a change occurs within your business operations, report it immediately to avoid surprises during policy renewals. Conduct thorough reviews of building exposures and insurance needs well in advance of a renewal, allowing time to tailor options to your property’s evolving requirements. Engage your brokers’ involvement in business decisions.  If actively pursuing new acquisitions of portfolios or individual assets, communicate early and seek assistance in the due diligence process.  Early communication can help identify additional information needs from sellers and help enhance the accuracy of modelling financial performance. 

While high interest rates and weather-related disasters may persist into 2024, multifamily real estate stakeholders can still position themselves for success if they implement strategies such as strategic risk management, personalized benefits and proactive safety measures to combat risks. Collaborating with industry experts to craft a tailored plan that addresses the nuances of current challenges will be pivotal in navigating the complexities of both the current landscape and future scenarios.

Source: RE Journals