Multifamily fundamentals – consisting of occupancy and rental rate growth – are showing signs of stabilization as of the 2nd quarter of 2024, driven by less volatility in interest rates, slowing inflation, declining new apartment construction, and an increase in apartment demand. As reported by RealPage Market Analytics, multifamily unit absorption has been steadily increasing during 2024. The industry is still contending with historic levels of new supply, which will continue to impact occupancy rates and rent growth through the balance of the year. There is a lack of new construction behind the huge wave of new units that has been delivered during 2023 and so far in 2024. As of Q2 2024, new construction permits, and new unit supply have severely declined from the recent boom. With lower new unit supply, and steady absorption of new available units, the trend of lower occupancies and lower rents is expected to turn in the later part of 2024 or early 2025. This overall era of lingering volatility, along with a pool of distressed sellers, continues to present potential opportunities for acquisitions.
INFLATION AND INTEREST RATES
The beginning of 2024 was characterized by lingering high inflation and high interest rates. Investors and owners were motivated by reports of anticipated interest rate cuts occurring later in 2024, buoyed by the Federal Reserve’s (“the Fed”) claim of a “soft landing.” After months of rising prices and strong economic growth, however, the likelihood of significant rate cuts appears to have diminished. Additionally, a recent employment report by the U.S. Bureau of Labor Statistics reveals that unemployment increased to 4.1% as of June 2024 (the highest since 2020). These factors, along with cooling wage growth, indicate that the labor market is moderating. Officials at the Fed have been clear that a sudden and notable weakening of the labor market could spur them to cut rates in an effort to stimulate economic growth.
It remains to be seen what The Fed will do with respect to interest rates over the balance of 2024, to either stimulate the economy or maintain its current course. Our preference is to invest in properties with long term, fixed rate loans, providing insulation from interest rate volatility.
NEW APARTMENT SUPPLY
The national multifamily market is in the midst of a two-year period when more than one million rental units are expected to be delivered. Deliveries totaled approximately 475,000 units last year, and nearly 550,000 units are slated to come online in 2024, representing the most rapid supply growth in more than 30 years. Despite this deluge of new units, absorption has continued to increase, totaling 52,000 units as of the end of 1Q 2024 – the third highest 1Q in over 20 years and 47% greater than the pre-pandemic 1Q average. The strongest positive net absorption trends can be found in the sunbelt region, which is one of our focus areas for investment. Dallas, Austin, and Houston were all in the top fifteen markets with the highest rates of net absorption. These strong net absorption metrics are a function of the area’s heavy demand for housing, and a driver of our continued focus on the region, where we have a large amount of multifamily real estate in our portfolio.
TRANSACTIONS ENVIRONMENT
Transactional volume across the multifamily industry has remained constrained in 2024. Elevated interest rates have fueled a gap between buyers’ and sellers’ pricing expectations, hindering transactional activity, resulting in a 28% year-over year decline in multifamily transaction volume. Reduced rent growth, elevated vacancy rates, and higher operating costs have also dissuaded sellers. Despite these challenges, the multifamily sector leads the real estate industry in transaction volume. In addition, there are recent signs that large institutional investors are increasingly open to opportunities in the multifamily sector; Blackstone recently acquired Apartment Income REIT for $10 Billion, Brookfield acquired 7,300 apartment units in the sunbelt in May 2024, and KKR is expected to pay more than $2 Billion for 5,200 units across the U.S. this summer. This activity, along with other recent major purchases, could indicate growing confidence among investors that apartment rents and values will soon begin rising again.
POSITIONED FOR THE LONG-TERM – LOOKING AHEAD
While multifamily fundamentals and transaction volume continue to be impacted by a relatively high interest rate market, there are signs of stabilization on the horizon. Demand is anticipated to outpace supply as this historic period of new deliveries winds down. Rental rates show signs of holding, with opportunities for rate increases anticipated in 2025.
The majority of our portfolio has fixed-rate debt which we believe provides a base of stability in our investments. We believe that we are well-positioned to continue managing our growing portfolio while remaining opportunistic by capitalizing on new opportunities while navigating the current market challenges detailed above.
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Amalfi Capital is a real estate equity firm founded in 2015 that is an investor in over 5 million square feet of property throughout the United States. Amalfi focuses on expanding its portfolio by partnering with highly experienced sponsors who are experts in their respective markets by investing in commercial & industrial assets that we believe are well positioned for above market returns over the long run. Our conservative approach combined with markets and properties that have historically high occupancy, such as our concentration on multi-family, industrial distribution & flex space facilities, has been a winning formula since our inception.
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