Multifamily Real Estate: Acquisition Comeback

INVESTING PREDICTIONS FOR 2023:

The year 2022 has been challenging for multifamily investing. High inflation, recession pressures, and Federal Reserve interest rate hikes all had an impact on multifamily markets. While inflation and recessionary pressure may not have had a large negative impact on market trends, the interest rate hikes have had a dramatic effect on multifamily acquisitions and operations.

Acquisitions slowed to record levels for 2022 and, for the first time, the federally backed Fannie and Freddie lending institutions didn’t allocate all available funds. It appears the Fed is slowing the interest rate increases, and more than likely we will see a stabilization of increases after the Q1 Fed announcements.

The two looming concerns are a recession and all of the adjustable-rate debt securing existing operators. Rising interest rates can be offset by rising rents, but rising rent will slow in a recession resulting in debt service going up and rents maintaining. This will cause operations to have reduced cash flow and struggle to make profits or refinance out of the adjustable higher interest rate loans.

Based on my experiences and observations, I believe acquisitions will come back starting in Q1 and, by Q2, see some stability and volume come back to trades. That being said, it is still important to keep an eye on the recession indicators and just how many distressed, adjustable-debt properties impact the market.

A great investment strategy for the near future is to target projects with low fixed-rate leverage and conservative growth in the business plan. There should be opportunity to acquire properties during the next year at reduced basis that will capture large upside if history holds up and the rates adjust back to what we have experienced in recent years past.

Multifamily is a phenomenal investment. The world needs shelter, and the shortage of places for people to live is not going to change anytime soon. As an operator, my opinion is that you can’t go wrong if you can acquire nice properties in great locations and offer reasonably priced shelter to working individuals and families.