Multifamily is obviously a lot more challenging today, as is most real estate overall, but MF in particular has lots of concessions in most markets, slow growth (if any), fewer transactions, lower valuations, and just softer market generally.
- Is it getting overbuilt, or are we just in a down part of the cycle?
- Voices like Jay Parsons, John Burns, many MF firm leaders, and others seem to all to some degree believe in the narrative that the supply drop-off, cultural effects like delayed marriage/kids/buying a house and more grad school/more moving cities, lack of housing affordability, and other macro effects are all tailwinds for multifamily for years to come, even if it's hard right now.
- Is that true in your opinion, or is multifamily being misunderstood? As developers have tied up and entitled sites and are just waiting to capitalize, will markets continue to see supply against a backdrop of easing demand, and fail to get back to the late 2010's (~2018) era of being one of the "darling" asset classes?
I don't have a current study in front of me, but "overbuilt" is relative to submarket and basis. For instance, you would have struggled to get deals done in some cities in 2021 even, while in the sunbelt you could throw a sub 4 cap exit on your model and have a list of equity and debt lined up by the end of business.
As for affordability, it is absolutely true that for most people, especially the people you would most likely be renting to, the economy is dogshit right now. Inflation is absurd, wages have stagnated, no one is hiring, and the average person is very stretched on money.
This is good and bad for you as a multi owner. The good part is, none of these people are buying houses and they most likely aren't interested in hopping between apartment complexes every year, making them more likely to renew. The bad part is, if you try to be aggressive with rents, they will absolutely reject you. At a well-run property, occupancy should be high right now, but rent growth is probably low to nonexistent. No one is losing their shirts, but no one is seeing their promote from the last few years of deals either.
But again, that is dependent on market too. It wouldn't surprise me for someone to reply to this post with "Man, my multi deal in [obscure submarket] is absolutely tonning it right now" and good on them if that's the case.
The biggest thing for me, as per your last bullet point, is that multifamily isn't being misunderstood (people will always need places to live) so much as the merchant-built multifamily model that has powered the last 15 years of development doesn't function the way that it used to anymore, because it was completely predicated on growth. A few years ago, I could build a deal at aggressive rent prices and underwrite 5% rent growth throughout lease-up (investors would discount to 3%), and overachieve. Every month I'd beat both my leases signed and rent growth projections. Now? There's none of that, so underwriting has to be more conservative.
But nothing else is changing to balance that conservative rent growth. Landowners are still pricing their plots at 2021 prices even though that doesn't underwrite anymore. Construction costs and materials are still pricing at 2021 prices even though that doesn't underwrite anymore. Architecture is up. Legal is up. Every single thing is more expensive, and no one really seems to want to budge, even if not budging is making them feel pain.
Eventually something will give. No is is going to sit around not doing deals and bringing in income forever. But will costs break before developers' need for fees? I'm not sure about that. Will merchant-built multifamily ever be back to the goldmine it was for most of the last decade and a half? I'm not sure about that either.
Probably some bias showing, but I saw between 2015-2022 or so the industry kind of deluded itself into thinking that managing the asset didn't matter and that aggressively chasing income came with no risks.
A lot of the people having issues at the moment were the ones that added every fee they could, kept rents high enough so occupancy never got above 94%, and then when things turned slightly against them they were staring down the barrel of 80% occupancy and 20 NTVs.
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