As I’ve noted many times before, I view this blog as a tool to clarify my thinking, vet ideas, and share my views at specific points in time.

Given the volatility and uncertainty in the current market, I’ve spent more time reading, thinking and writing recently. The multifamily market today is particularly interesting. I wrote a general update back in June, where I provided an overview of inflation and rates, the single-family housing market, the strength of the consumer, and multifamily supply/demand fundamentals.

TLDR: multifamily fundamentals remain strong, I expect rent growth to be solid over the near-term, and I remain bullish multi long-term.  

However, anyone who is active in the multifamily market knows that values are off ~10%-20% from their highs (except some delusional brokers/sellers), despite the favorable market outlook and exceptional recent performance. This may be difficult to grasp, but it makes sense given the current economic environment.

First off, my rough 10%-20% decline in values is part firsthand experience and part anecdotal. We’re in the market with several deals and pricing came in on average ~15% below initial guidance. In my daily conversations with brokers, they’ve communicated similar discounts on deals they’re actively marketing. This decline in value is further supported by CBRE’s Prime Multifamily Underwriting Survey.  

So why are values down?  

Fundamentals are deteriorating, the future is uncertain, inflation will eat at future cash flow, and the debt markets are a mess. More specifically, rent growth forecast and debt terms are much less attractive today than they were 3 months ago.   

Deteriorating Fundamentals

It’s becoming clear that fundamentals are deteriorating. Although rents are up significantly year-over-year, I’m seeing rents flat to down over the past few months when looking at new lease rates. For the deals I oversee (Class B multi in the Southeast), new lease rents peaked in Q1 and are off ~5% in Q2. Lease trade-outs are still staggering, but that is a lagging indicator and more a reflection of loss-to-lease as opposed to market rent growth.

It’s hard to say what’s driving this slowdown, but rents likely got ahead of fundamentals. The big question is, where do we go from here?

In short, nobody knows, but there’s a consensus that we’re going into a recession. If everyone believes we’re headed for a recession, they’re going to act in such a way that makes it true.

There is little data signaling a recession, but we are seeing some signs of slowing in the economy.    

• The job market remains strong, but it’s loosening a tad. Initial jobless claims in June inched up to its highest level since November 2021.
• The consumer balance sheet remains strong, but the personal savings rate is declining as rising costs eat into savings.

The future is unknown, range of outcomes is wide, and the general sentiment skews negative. This leads me to the debt markets.

Frozen Debt Markets

The recent bid/ask spread today is being driven primarily by the knee jerk reaction of the capital markets. Lenders, if they are still active, are pricing deals conservatively. Rates are up ~150-200 bps and lenders are underwriting deals on in-place cash flow as opposed to proformas. Given the uncertainty in the market, many lenders have moved to the sideline and are digesting where the market is headed before they resume activity.

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So that’s where we are today, but I think it’s important to keep everything in perspective:

• The pricing reset is from an inflated base and cap rates remain at historically low levels. Deals in the Sunbelt are trading in the high 3’s instead of mid-3’s.
• Rent growth forecasts remain above long-term trend, but we’re seeing decelerating growth.  

We’re going to continue to be selective with acquisitions, but I’m long high-quality and well-located multifamily assets in the southeast and believe performance will continue to thrive, even in the face of economic headwinds.  

It’s cliché, but don’t bet against the U.S. economy. If there’s one thing we know for sure, the U.S. economy will be much larger in 10 years than it is today.