10 Multifamily Predictions for 2024 (Part 2)

6: Rent growth will stabilize to historic norms.  

The negative rent growth in some markets in 2023, as predicted by MultilyticsSM,  our proprietary suite of machine-learning models, will trend up in 2024 as we work through supply. They will head back to the historic norm—generally, within a 2% to 4% range—by Q3 or Q4, bringing rent growth back to 2022 levels, according to our latest Multilytics rent growth report. We saw average multifamily rent growth drop from September 2022 through 2023, and rather than gaining new ground, we will be catching up. This process will continue throughout 2024 and into 2025. 

Source: Multilytics℠

7: More distressed assets will emerge in multifamily in the second half of 2024.  

The variable-rate bridge loans mentioned above will come due next year, and many owners will not be able to afford the cash required to refinance them at today’s much higher rates—inspiring the use of the term “cash-in refi.” That’s because they did not manage risk properly by buying properties at prices well below replacement costs. By Q3 2024, we’ll have many opportunities to purchase quality multifamily assets with new valuations 30% or more below those of recent years. This will be a generational opportunity to buy quality value-add properties in growing markets at prices below replacement cost. It’s important to note, however, that this is a valuation problem for an otherwise solid asset class, not a demand problem.  

Multifamily Loan Maturities by Origination Period

Note: As of Oct. 24, 2023Source: MBA, Trepp, RCA, Newmark Research

8: Home prices will start to correct.  

Many people can’t afford a home right now due to elevated interest rates, rising prices, lack of supply and higher insurance costs spurred by extreme weather. This has fed demand for build-for-rent housing that offers larger homes and outside spaces. The supply of available homes for purchase will increase as more new construction is delivered in 2024, and prices will rise more slowly than they did in 2022 and 2023. But I believe the market will begin to correct starting in Q3 due to strong job growth and demand—even as interest and mortgage rates remain close to (or top) 6% in 2024. People want to buy homes, and some will be able to afford them. 

9: High insurance rates are here to stay.  

Due to the increased frequency and severity of weather-related disasters, rising replacement and construction costs and inflation, insurance repriced in a violent way in 2022. Despite owners often getting less for their money, these rates are here to stay and will impact owners who haven’t broadened their margins to account for rising costs. This affects lending, valuations, cap rates, net operating income and more. For example, if our insurance for a 300-unit property was $500 a unit in 2022, and now it’s $1,000 a unit—a typical scenario today—that’s an extra $6 million to our operating costs. We have adjusted our Funds and yield projections for this and reject projects that don’t meet our required return on investment due to insurance costs. We don’t expect another dramatic repricing, but we don’t think insurance rates will go back down, either. 

10: Consolidations will shrink the real estate investment industry.  

During and following the Great Recession, we saw investment capital go to the largest providers. That will happen again next year. Developers, general partners and sponsors, private equity managers and property managers will consolidate, and many companies will go out of business. We’re already seeing it as larger firms with greater resources purchase whole portfolios from smaller or under-resourced firms that no longer have robust balance sheets. When things get crazy, investors seek out bigger names with solid reputations.  

Why I Remain Optimistic About Multifamily 

Housing is an essential asset. And I remain bullish on multifamily real estate in the long term for several reasons: America has had a housing undersupply problem since the Great Recession. We’re currently facing a housing supply shortage between 5.5 million and 6.8 million units, according to the National Association of Realtors, and we need to build 4.3 more apartments by 2035 to meet demand, the National Multifamily Housing Council estimated. This undersupply is growing due to low multifamily starts in 2023 and will persist in 2024 as lenders continue to pull back. As well, multifamily investment returns have exceeded the average 25-year S&P returns over the past 25 years and provide higher dividends and tax efficiencies, including depreciation and more. 

We are seeing generational opportunities in senior debt and preferred equity, both of which provide protection in the capital structure and the potential for 10% to 15% returns. The world is uncertain, but it remains a mistake to stay out of the investment market, and this will continue to be true in 2024.