For this new installment of our Person of the Week feature, the topic is the multifamily housing market and our guest expert is James Glasgow, chief investment officer at Castle Lanterra, a Suffern, New York-headquartered real estate investment company focused on the acquisition and management of quality income producing multifamily market.
The first question is the most obvious: Where do you see the multifamily housing sector today?
If you look at the [Green Street] Commercial Property Price Index, multifamily values are down 30% from the peak of March of 2022. And most of that value decline is attributable to an increase in interest rates and cap rates. I think for 2024, we’re still expecting – especially in the Sunbelt markets – that there’s going to be a significant amount of supply.
That supply is going to have to be absorbed, but in certain markets we’re not expecting rent growth – and we’re expecting a pickup in vacancy rates. We think it will be absorbed – we think there’s a demand, but there’s a lot of supply coming on the market and that supply has to be absorbed over the next 12 to 24 months.
Do you see rents going up in the near future?
We’re expecting rents to be flat in most markets. Obviously, it’s market by market, but generally we’re expecting in the multifamily sector for rents to be relatively flat for 2024.
Who’s moving into the multifamily housing? Do the tenants come from all age demographics, or is it primarily younger people who aren’t able to get into the homeownership at this time?
You have dislocation in the single-family market. Certainly, a lot of young people are renting because they can’t afford to buy. I think that with higher interest rates and the increased cost of owning, it is drove more people to rent versus buy. Even those who were approaching what they thought would be first-time homeownership had to think twice about buying a home because of the increase in mortgage costs. If somebody was planning on buying a house in 2023 or late 2022, they put those plans off.
If we were to have this conversation a year from now regarding multifamily housing, where would you see the market at that time?
I see multifamily stabilizing a year from now. I think a lot of supply will be absorbed, which is a good thing, and I think a lot of current owners are working through financial difficulties on existing portfolios – because the truth is, in a lot of cases people were assuming pretty dramatic rent growth on their new developments and that rent growth isn’t there, so they have to recalibrate their capital structure.
A year from now, I think two things will happen. One, there’s an expectation that rates will come down, and if rates come down it will be in the second half of the year and it’s not going to be super quick. But any short-term rate relief will be helpful.
And then, as units get absorbed there’s less construction in the pipeline, especially in the Sunbelt markets – because a lot of this stuff was financed with construction loans at incredibly low spreads in a 0% interest rate environment. Well, that’s not the case today. Construction lenders recalibrated what they’re willing to lend and how they’re pricing it, so that changes the whole metric in terms of rent growth, construction costs and carrying costs. You’ll have to be able to justify those costs in terms of in-place rents and in cap rates value.
There are constraints today, but I think should be a bit more optimistic about the next 12 to 24 months.
;
