10 Multifamily Predictions for 2024 (Part One)

1: Interest rates will stay high.  

Inflation has slowed since 2022, and so have interest rate hikes. All four increases in 2023 were 25 basis points (bps), unlike the 50 or 75 bps seen in 2022. But they haven’t been enough to lower inflation to the Fed’s goal of 2%. I see the 10-year Treasury yield remaining within the current range of 3.50% to 4.50%, with no expectation that it will drop substantially in 2024. The Fed must keep the Fed fund interest rate high long enough to slow inflation. More significantly, bond buyers are demanding a real return of 1.5% over the nominal interest rate, and U.S. government bond auctions are seeing low demand. These fundamentals are forcing long-term interest rates to remain higher than we would like or expect.  

Effective Fed Funds Rate Vs. Inflation Rate, 2020-23 YTD  

Source: St. Louis Federal Reserve  

2: A recession is likely.  

Despite all the predictions of a 2023 recession—including ours—it has yet to happen. Why not? Many, including us, didn’t fully account for the resilience of consumer spending and the robust job market. While homeowners who locked in low mortgage rates will have more cash flow for consumption, businesses will not have access to the credit needed to start or grow, and this will finally spur a mild recession in the latter half of 2024, deepening in 2025. As I said above, the fact that it’s a presidential election year may prompt attempts to stimulate the economy. However, a potential recession’s depth and breadth would depend on actions by the Fed and the Legislature, and whether the latter intervenes with fiscal stimulus.  

3: Multifamily market fundamentals will remain strong.  

This is the worst time possible to buy a home; the price discrepancy between buying and renting is at its most extreme since 1996. With the total number of homes for sale at a record low and mortgage rates that top 8%, making the monthly payment on a median-priced home costs nearly $1,000 more; despite record unaffordability, home prices keep rising, Goldman Sachs has reported. Also, 57% of Americans say they prefer to live in larger houses, recent Pew Research showed, due in part to hybrid work. Yet homeowners who refinanced at low rates are unwilling to sell their homes and replace a 4% mortgage with an 8% one—even if they want or need more space—creating a supply drought and keeping home prices high. All this keeps demand and absorption for apartments and rental homes strong, even in the face of record supply, and likely to stay that way for years.   

Cost of Homeownership Vs. Renting

Sources: Newmark Research, Federal Reserve Bank of Atlanta, RealPage

4: New multifamily development will come to a standstill, even as demand increases.  

Real estate lending is shrinking to historically low levels, the Wall Street Journal reported recently, threatening a rise in defaults on expiring debt and spurring a sharp decline in new construction starts of apartments and other property types. Only $28.2 billion of loans converted into commercial mortgage-backed securities have been issued this year, the lowest figure since 2011. Not surprisingly, new apartment development starts have fallen dramatically this year due to higher interest rates, declining rents and oversupply. Because of all these issues, it will be 12 to 18 months before new construction gains momentum again.   

5: Elevated multifamily valuations have mostly corrected but will fall lower.  

Multifamily asset valuations have dropped 15% to 30% and will drop about another 10% next year for two reasons: First, rents will remain flat or see low growth. Second, operating expenses—wages, taxes, insurance and more—have risen dramatically and may continue to rise. So, expenses are rising faster than revenue, and equity multiples are falling because of interest rates. Where we used to see multiples that were 30x earnings, it’s now more like 20x. We take these variables into account in our acquisition underwriting and leave comfortable margins to ensure healthy returns, but many owners will be underwater on 2021 variable-rate loans that come due in 2024 and were made at much lower interest rates than those offered on refinancing. It’s not a healthy, or sustainable, place to be when the cost of long-term debt is hovering at about 6.5% and cap rates are 150 basis points below that. This situation can only be corrected if cap rates increase or interest rates drop.