Multifamily building executives are optimistic that apartment investment will pick up

Apartment investment should pick up in the United States through the second half of 2024 as more stable interest rates give buyers and sellers the confidence to narrow the price gap, multifamily executives said at the annual Marcus & Millichap on the outlook for the new year.

Executives representing U.S. companies struck a positive note during an online broadcast hosted by the Calabasas, California-based brokerage firm. They argued the market had nowhere to go but higher after U.S. apartment investment collapsed this year as investors reacted to higher interest rates, recession fears and the inability to agree on deal prices caused buyers and sellers to withdraw from the market.

“I am optimistic that there will be more investment opportunities as we move into 2024 and there will be some good buys in the near term.” It’s hard to imagine there will be any less,” said Doug Root, co-founder and managing partner of Blackfin Real Estate Investors, an Arlington, Va.-based multifamily investment firm that owns more than 11,000 units. “There’s a culmination of rents slowing down a bit and more investors realizing that valuation hasn’t changed materially.”

The economy is in better shape now than when inflation broke out and the Federal Reserve tried to tame it by imposing interest rate hikes that made financing much more expensive. Many economists now predict that the economy can avoid recession and maintain steady job growth, allowing the Fed — if not to immediately ease interest rates — at least to stop raising them.

John Chang, senior vice president of research at Marcus & Millichap, said during the broadcast that analysts now project the economy to grow 2.4 percent in 2023.

“This is the kind of soft landing the Fed is hoping for, where the pace of job additions is steadily slowing,” Chang said. “The U.S. is expected to add nearly 3 million jobs in 2023 and another 1.7 million in 2024, with the pace slowing over the year. We still have a labor shortage, but it is decreasing and we are moving in the right direction.

Inflation and high levels of debt held by consumers, businesses and commercial real estate owners are likely to continue to be risks next year, but the unemployment rate and job creation are still high, Chang added.

“We’re seeing some really good indicators, especially in the labor market, and they’re all really positive for the multifamily market,” Chang said.

The fundamentals of the multifamily sector remain relatively strong, particularly in the Midwest, which is currently outperforming any other region of the country, said John Kinzelberg, chief executive of Chicago-based Highgate Capital Group, which typically invests in value-added cities in that region on country. “We believe multifamily performance will only improve over the next three to five years, which is our investment time horizon.”

Although developers completed a record number of units this year, “the good news is that construction starts are down quite a bit because of the high cost of construction financing,” said Jeff Tripaldi, managing partner at Tilden Properties, which invests in value-added properties in California and Nevada. “I think in the last half of 2024 and into 2025 there will probably be less new supply.”

Less supply could spark renewed interest among investors in existing properties, helping sales rise again.

This would help the multifamily sector maintain its place as the best choice for commercial real estate investorssaid the panelists.

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