As an investment advisor, you play a crucial role in guiding your clients through the ever-evolving landscape of multifamily real estate. With 2024 unfolding, it is essential to understand the latest trends and strategies to optimize returns in this sector. The multifamily segment, which comprises a significant portion of the U.S. commercial real estate (CRE) market, continues to present valuable opportunities despite the recent challenges all sectors have faced in this late stage of the cycle.

With insights from a recent mid-year review of the multifamily property sector on Forbes.com, and echoed by other financial institutions that track commercial real estate, this blog highlights several trends and strategies you should be aware of as you consider future real estate investments for your clients.

Multifamily Real Estate: A Pillar of Stability and Growth

Historically, multifamily properties have consistently demonstrated their value through stability and reliable income streams. These assets benefit from annual lease turnovers, which help mitigate the impacts of market volatility and seasonality. Larger multifamily complexes, in particular, can withstand individual vacancies without significantly affecting overall rent rolls, providing a dependable source of revenue. The sector's resilience makes it an attractive option for investors seeking long-term value.

Key Trends Shaping the Multifamily Market in 2024

1. Urbanization and Demographic Shifts Drive Demand

Urbanization remains a significant driver for multifamily rental properties. By 2025, nearly 89% of the U.S. population is expected to reside in urban areas, fueled by an aging population seeking proximity to public facilities and an increasing immigrant population favoring city living. Multifamily housing is well-suited to meet the needs of this expanding urban demographic.

2. Supply Constraints and Housing Shortages

The multifamily market continues to grapple with supply constraints. Since 2006, home construction has declined sharply, resulting in a substantial housing shortage. Factors such as rising labor and material costs, global political instability, and supply chain disruptions have exacerbated this issue. The resulting demand-supply imbalance is likely to drive rent increases over the long term, enhancing the investment potential of multifamily properties.

3. Impact of Increased Supply in 2024

According to CBRE's mid-year report, 2024 is expected to see the delivery of 440,000 new apartment units, the largest wave of new supply in decades. This influx will temper rent growth and improve affordability for renters. However, the overall vacancy rate is projected to rise, with rent growth decelerating to around 1.2% for the year. Despite these supply headwinds, the average occupancy rate should remain above 94%, supported by strong job growth in key markets such as Austin, Dallas, Nashville, and Atlanta.

4. Long-Term Rental Demand and Economic Indicators

Rental housing continues to serve a significant portion of U.S. households, with nearly 44 million people relying on rental properties. This demand is driven by both "renters-by-necessity" seeking more affordable living options and "renters-by-choice" preferring the flexibility of renting. The multifamily sector's long-term viability is underscored by these persistent demand drivers.

5. Treasury Yields and Cap Rates

The rise in interest rates, driven by multiple rate hikes, will likely influence cap rates. However, cap rates typically lag behind market movements and follow a longer-term declining trend. The spread between 10-year treasury yields and cap rates, a recognized risk premium indicator, suggests potential opportunities for multifamily investors as cap rates rise and yields decrease.

Effective Strategies for Multifamily Investment Success

To identify opportunities in the current market through 2025, look for investment managers who pursue one or more of these strategies:

1. Target Quality Mid-Market Opportunities

Focus on mid-market properties with higher-than-average cap rates. Investment managers with available capital may choose to purchase these assets with low leverage or all cash, endure negative leverage, and refinance in a potentially improved market within two to four years.

2. Explore Assumable Financing Deals

Seek investment managers who pursue assumable financing deals that offer strong cash-on-cash returns. This strategy is particularly beneficial for long-term investment management firms and family offices. Be diligent about refinancing terms, including interest-only periods, prepayment penalties, and exit fees.

3. Leverage Value-Add Opportunities

Identify value-add properties with lower valuations due to expensive financing. Implement hands-on strategies to enhance property value and achieve rent growth. This approach can yield significant returns in a constrained supply environment.

Conclusion

As an investment advisor, staying informed about the latest trends and implementing strategic approaches is essential for success in the multifamily real estate sector. By prioritizing quality opportunities, exploring value-add and mid-market investments, you can help maximize returns and provide long-term value for your clients. Despite the slowdown the sector has experienced in this late stage real estate cycle, the multifamily market's stability and growth potential make it a compelling investment choice in 2024 and beyond.