Over the past few years, with the world changing so rapidly, I’ve posted several times on the state of the multifamily market. It’s been a great way to organize my thoughts, distill all the information I’ve been consuming into a semi-coherent narrative, and justify my investment strategy. Here are just a few of the posts:

• Making Sense of the Multifamily Market (June 2022)
• A Golden Era for Apartments? (February 2021)
• What’s Going on with the Multifamily Market (August 2020)
• This is the Moment We’ve all been Waiting for (June 2020)

Suffice to say, my views on the market change quickly, but I’ve been consistent in my long-term approach: if we buy at an attractive basis, control repositioning costs, and structure investments for the long-term, multifamily real estate is a great get rich slow investment.

That brings us to today, where we’re in one of the most interesting environments of my career. Here are just a few of the factors impacting today’s market:

• The Fed’s historic rate hike is finally causing distress (Tides!), primarily on older vintage value-add deals with high-leverage floating rate debt bought toward the top of the cycle.
• There is a growing consensus of a soft landing and that rates could stay persistently high through 2024 (5Y-10Y at 4%+).  
• The record-setting new supply is beginning to hit the market, causing pockets of extreme competitiveness (4 months free on some lease-ups!) and strained rents and occupancies. Fundamentals are undeniably cooling, and peak supply could extend through 1H 2025.
• There are structural pressures from insurance carriers (extreme in FL), renovation costs, and regulation.
• There remains a looming, albeit less concerning, risk of a job-loss recession in the near future.
• Capital remains on the sideline, waiting for more certainty and for transaction volume to pick back up.  

The factors above are leading to, what I believe, is the best buying opportunity in a decade for long-term focused private capital.

At the same time, I’m not ruling out that things could get worse, and multifamily assets become cheaper (more on that below). However, when assessing opportunities today, I’m constantly reminded of this Howard Marks quote.

“We don’t say, it’s cheap today, but it’ll be cheaper in six months, so we’ll wait. If it’s cheap, we buy. If it gets cheaper and we conclude the thesis is still intact, we buy more. We’re more afraid of missing a bargain-priced opportunity than we are of starting to buy a good thing too early. No one really knows whether something will get cheaper in the days and weeks ahead – that’s a matter of predicting investor psychology, which is somewhere between challenging and impossible. We feel we’re much more likely to correctly gauge the value of individual assets”.

Howard Marks

High-quality multifamily assets in the Southeast are a “good thing” and the ability to acquire assets below replacement cost with a going-in cap of 5%+ and stabilized yield of 6.25%+ feels like a relative “bargain” to me. I wouldn’t say things are “cheap” by any stretch of the imagination with fixed-rate debt in the high 5’s and NOI’s flatlining, but I also think we’re going to look back in 7-10 years and love the basis.

If fundamentals erode further and permanent financing remains in the ~5.75% range, we could easily see cap rates expand another 50-75 bps. But since I like deals at a 5.25% cap, I’m going to love them at 5.75%!

I have no clue what’s going to happen in the near-term, but here are the questions I’m pondering:

• When will capital come off the sideline? What magical signs/metrics are they looking for?
• What’s the bigger risk, being too early or too late?
• Will the capital coming off the sideline outweigh the transaction volume, keeping cap rates stubbornly low?
• What would be the impact of a job-loss recession?
• How drastically will new starts fall and how limited will new supply be in 2026/2027?

Deal flow will pick up later this year, driven by the combination of increased loan maturities (semi-forced sellers), merchant builders incentivized to exit (motivated sellers), and pockets of distress.   

My view is that there are attractively priced deals today and that by waiting for things to get worse, you risk missing a good opportunity.

What do you think? Hit me up on Twitter.