As an investment advisor, you understand the complexities of the commercial real estate market and its importance to your accredited investor clients. The past few years have been challenging for commercial real estate, to put it mildly, but current market conditions are creating opportunities that point to sustained growth and demand for multifamily investments that pursue value-add strategies.

Understanding the Current Market

The challenging factors impacting recent commercial real estate valuations and performance include a high interest rate environment, elevated operating costs, increased flex hours/work-from-home arrangements (office), dramatic shifts in shopping habits (retail), and an influx of new supply (industrial and multifamily). 

Multifamily housing, in particular, has been affected by increased debt costs, refinancing issues, and new supply. However, unlike other sectors, the issues in multifamily housing are cyclical and somewhat mitigated by the overall housing shortage in the U.S. This cyclical nature suggests that multifamily investments generally remain resilient and continue to offer stable performance through economic fluctuations.

Supply and Demand Dynamics

Currently, the multifamily market is experiencing a surge in supply, leading to decreased rents and property values in certain markets. According to KKR’s recent market report, over $250 billion of multifamily debt maturing in 2024 is putting pressure on owners to refinance, unfortunately, at significantly higher rates. However, supply is expected to decrease after 2025, leading to a more balanced market. And many well-capitalized property owners with lower levels of leverage have been able to weather this high-rate environment quite effectively.

More importantly for your clients who may be interested in re-entering the market while valuations are low, long-term demand for multifamily housing looks positive due to:

Strategic Investment Opportunities

In light of these market dynamics, now is a good time to consider strategic investment opportunities in multifamily assets. Recent sales transactions in 2024 have proven that well-capitalized investors are acquiring properties at or below replacement costs. Some have even traded at the outstanding debt balance, providing significant discounts to 2021-2022 sales comps. Acquiring multifamily properties during periods of distress can offer opportunities for strong longer-term returns as valuations increase.

Also, well-capitalized investment managers who pursue value-add strategies are particularly well-positioned to enhance investor value through property enhancements and operational improvements. In addition, these managers are often in a position to identify and close attractive off-market opportunities that other managers may not be aware of.

Managing Interest Rate Risk

Interest rate fluctuations are a significant concern for multifamily investments. Managers embracing a longer-term investment strategy can more effectively manage interest risk. Key tactics include reducing leverage and maintaining flexibility with timing.

Managers with lower debt levels and the ability to endure different stages of the market cycle are those you’ll want to be more aligned with when considering multifamily real estate investments for your clients.

The Long-Term Outlook for Multifamily Real Estate

Despite the current commercial real estate environment, the long-term outlook for multifamily real estate is promising. After 2025, the market is expected to see sustained demand and limited new supply due to the structural housing shortage. Multifamily assets are also likely to benefit from the anticipated stabilization of interest rates and continued economic growth.

Multifamily properties have shown resilience through various economic cycles. Housing is a fundamental need, and spending on shelter tends to remain stable even during economic downturns. This makes multifamily real estate a compelling choice for your accredited investor clients who appreciate owning real estate.

Conclusion

The multifamily housing sector offers a blend of near-term (but diminishing) challenges and significant opportunities for investors with a long view. By guiding your clients towards strategic multifamily investment offerings from experienced, reputable investment management firms, you can help them make informed decisions that can enhance their real estate holdings.