Isaac Dixon is senior vice president of real estate at DiversyFund Inc., a San Diego-based real estate investment platform. For this new edition of Person of the Week, Dixon offers his views on the current state of the multifamily housing sector.
My question is a broad one: What is the state of multifamily housing today?
That’s a great question. We look at it quite frequently, and what we’ve seen is transactional volume has really, really slowed down. In 2022, we saw about $227 billion of transactional value of volume and that decline has continued through 2023.
In our opinion, that decline has largely been caused by a disconnect between buyers and sellers on what they think real estate is currently worth. Everyone’s trying to adjust to this new world we live in and that has caused cap rates to expand to some extent.
Most sellers that don’t need to sell have decided to wait on the sidelines for a more favorable point to exit. And the sellers that need to sell are having to adjust their expectations to meet the current market. Most buyers these days are looking for positive leverage at purchase or a direct path to positive leverage in a relatively short timeframe.
Are lenders originating loans for multifamily housing transactions?
Right now, yes – you can still get loans. But underwriting has gotten much more tight. We’re a little concerned as you move in the future.
What is it going to take for the market conditions to improve?
It depends on market conditions. From an operational perspective, multifamily is pretty stable and strong. Where you see the issues are in the capital markets, which are putting pressure on valuations versus overall performance.
Are some parts of the of the country stronger than others for the multifamily sector?
Real estate’s always a local market, right? You’re always going to want to look for markets that have job growth, employment growth, strong long-term fundamentals and government policy that leads itself to long-term success.
How does the Federal Reserve’s policy during the past year impacted multifamily? And what happens if the Fed continues to raise interest rates?
The Fed’s effort to combat inflation certainly has an impact, primarily on our cost of capital. And cost of capital is very, very important when you’re buying and selling real estate. So, that increased cost of capital has certainly put pressure on cap rates causing them to expand.
Buyers are looking for positive leverage, which means you’ve got to get a higher cap rate to go and live with higher cost debt. The nice part about commercial real estate is lock in longer term for loans, so a lot of these properties that are purchased two, three or four years ago have long term debt – they’re able to ride this process out while the Fed works through its battle with inflation. If it continues to increase, I think you’ll need to see more of the same.
If we would have this conversation a year from now, where would you see the multifamily market at that time?
I think what you’ll see is more of the same. You’re going to see fundamentally a strong asset class with a resilient consumer that you’re still seeing – strong occupancy numbers, strong rent growth, NOI growth. The housing supply issues aren’t going anywhere in this country, and as long as those remain the fundamentals for multifamily will remain pretty strong.
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