In an environment where commercial real estate market dynamics are continuously shifting, multifamily apartment real estate stands as an asset class that balances a history of resilience with the ability to adapt to new emerging challenges. Understanding why this sector performs differently from other asset classes helps ensure your investment advice to clients remains grounded and reinforces why most investment advisors use private apartment real estate as a strategic allocation capable of weathering changing market conditions over the long term.

A Closer Look at Multifamily Real Estate in 2024

Multifamily properties have demonstrated commendable performance over the past 18 months, even as we've navigated through the complexities of the late-stage commercial real estate cycle when properties are impacted by oversupply, rising vacancy rates, and stagnant rent growth.

Sustained demand for apartments continues to fuel the sector, underpinned by a massive undersupply of homes and stubbornly high mortgage rates that keep would-be homeowners on the sidelines. However, it's essential to acknowledge that multifamily rent growth, while still positive, has moderated compared to previous years. This tempered growth is a reflection of a maturing market cycle.

Interest Rates and Their Dual-Edged Impact

Current high interest rates are a double-edged sword. On one hand, they keep mortgage rates elevated, preventing many from transitioning to homeownership, thus bolstering the rental market. On the other, high rates also impact investment dynamics, influencing financing and labor costs and yield expectations. For multifamily investments, this means a careful analysis and management of financing and operational strategies are essential to sustaining NOI for investors.

Occupancy Rates and Demand Dynamics

With vacancy rates expected to hover around 6.25% nationally throughout 2024 and stabilize at 6% the following year¹, the multifamily sector shows signs of enduring demand. Yet, this demand is not uniform across all segments and geographies, signaling the need for investors to diversify their portfolios with multiple apartment properties.

The Path Forward: Navigating Tempered Growth

The outlook for multifamily real estate remains fundamentally positive, supported by structural demand and the sector's inherent resilience. However, tempered growth is the phrase of the moment, as forecasted by many industry experts. This moderated pace is not a deterrent but a sign of a maturing market where strategic investment decisions become paramount. It emphasizes the importance of evaluating a multifamily apartment fund from the perspective of a long-term investment rather than a market-timing tactical option.

Strategy Matters 

A key consideration for you as an investment advisor overseeing your clients’ allocations to commercial real estate is the type of strategy a fund manager uses and how that strategy may perform in different phases of the market cycle. For example, a core strategy focuses on acquiring premium quality properties with low leverage and stabilized rents supported by long-term credit-worthy residents. It is primarily a strategy designed to provide investors with reliable income.

On the other hand, core plus and value-add strategies are those where the manager acquires properties they believe that cash flows and valuations can be enhanced through operational and property improvements. Managers pursuing these strategies in the late cycle environment may be well positioned to acquire distressed assets at below-market valuations, thus increasing the appreciation potential of the properties once improvements are made and the updated properties are brought to market. 

Conclusion

For multifamily real estate investors, the landscape in 2024 and beyond presents a mixture of familiar strengths and new considerations. While the sector continues to offer stability and resilience, the current economic context and shifting demand patterns necessitate a more nuanced approach to investment strategies. By providing a balanced view—acknowledging both the opportunities and the challenges—you can help equip your clients to make informed decisions about a multifamily apartment investment.

¹https://www.fanniemae.com/media/50101/display