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In 2023, the multifamily real estate market has been experiencing a shift from the dynamics we’ve seen over the past year.
As the industry continues to adjust to factors such as rising interest rates and evolving buyer-seller expectations, we see that a sense of stabilization is emerging. Here, we’ll take a look at some of he current trends we’re seeing in the market that are shaping the multifamily real estate landscape today.
1. Stabilizing Vacancy Rates and Rent Growth:
After a period of low vacancy rates and high rent growth, the multifamily real estate market has begun to stabilize in 2023. The first quarter of the year saw a modest increase in vacancy rates, approaching the industry standard threshold of 5%.
It’s important to note that this increase was anticipated due to pre-existing demand that is expected to result in favorable absorption in the second quarter. Rent growth also showed signs of stabilization, with a growth rate of 4.5% in the first quarter, indicating a healthier market compared to the unsustainable growth of previous years.
2. Declining Transaction Volume:
One notable trend in 2023 is the decline in transaction volume.
Compared to the previous year, transaction volume decreased by approximately 63.7%. When compared to pre-pandemic levels (2013-2019 average), transaction volume in 2023 was down by 25%. This decline can be attributed to various factors such as uncertainty in the market, interest rate fluctuations, and the bid-ask spread between buyers and sellers.
3. Impact of Interest Rates on Underwriting:
Interest rates continue to play a significant role in underwriting multifamily properties.
Loan assumptions are still trading for a premium, but the industry has seen a shift in the loan programs offered by agencies like Fannie Mae and Freddie Mac. The five-year term with full five years of interest-only (IO) payments, which was popular in the fourth quarter of 2022, has been reduced.
Underwriting now reflects a 7 or 10-year term with 3 to 5 years of IO payments, along with flexible prepayment buy-down options based on the business plan.
4. Collapsing Bid-Ask Spread:
The significant disconnect between buyers and sellers’ expectations observed in the previous year has shown signs of improvement.
The gap between initial offers and acceptable bids has shrunk to sub 5% from a previous 10% discount. This change can be attributed to brokers setting more realistic expectations and advising sellers based on market trends and return expectations.
The average cap rate for transactions in the first quarter of 2023 was around 5.3%, indicating a more accurate pricing and reducing the bid-ask spread.
5. Operational Focus on Expense Discipline:
From an operational standpoint, multifamily properties have shown a focus on expense discipline.
Property owners and management companies are optimizing expenses to maximize profitability, especially in preparation for potential sales. This includes reducing payroll costs by sharing resources with nearby properties and outsourcing tasks to lower-cost providers.
The emphasis on expense management helps improve financial statements and enhance the attractiveness of properties in the market.
Key Takeaways:
The multifamily real estate market in 2023 is characterized by stabilization and adjustments.
Vacancy rates are showing signs of normalization, and rent growth has moderated to a more sustainable level.
Transaction volume has declined, reflecting market uncertainty and changing buyer-seller expectations.
Interest rates continue to impact underwriting decisions, with a shift in loan programs.
The bid-ask spread has narrowed, indicating improved alignment between buyers and sellers.
Operational focus on expense discipline has resulted in efficient property management.
These trends provide valuable insights for investors and industry professionals navigating the multifamily real estate market. As things continue to evolve, investors and industry professionals must adapt to these trends and make informed decisions. Stabilizing vacancy rates and rent growth present opportunities for long-term investments, while the declining transaction volume may create favorable conditions for negotiating deals.
Understanding the impact of interest rates on underwriting and the collapsing bid-ask spread can help in structuring successful transactions. Additionally, operational focus on expense discipline enables property owners to maximize profitability and enhance the attractiveness of their properties.
By staying informed and aware of these trends, investors and industry professionals can navigate the multifamily real estate market with confidence in 2023 and beyond.
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