Is Stability Returning to Multifamily? Top Trends Shaping the Markets in 2023

The real estate market in 2023 has brought about several changes compared to the previous year. To gain a better understanding of these developments, we were joined once again by our own Ryan Rasieleski to share his insights on how 2023 is playing out differently than 2022.

He discusses the stabilization of the multifamily real estate market, rental growth trends, transaction volume, and the impact of the Federal Reserve's actions on the economy. Additionally, since we're buying a new asset in the market, we get his perspective on Phoenix, Arizona to understand its unique dynamics.

Overview of 2023: Stabilizing Multifamily Real Estate Market

Ryan explains that the multifamily real estate market is gradually stabilizing after a period of low vacancy rates, high rent growth, and low interest rates. In the first quarter of 2023, vacancy increased by about 30 basis points, nearing the industry standard of 5%.

Although there was negative absorption in the first quarter, indicating a pre-leading demand, Ryan anticipates a positive absorption in the second quarter. Average effective rents grew by 4.5% in the first quarter, signaling a healthy indicator of stability compared to the unsustainable rent growth of previous years.

Insights on the Phoenix, Arizona Market

The Phoenix market has some unique characteristics.

Ryan shares that the market has shown resilience and remains attractive to investors due to factors such as population growth, strong job market, and favorable business environment. He emphasizes the importance of infill locations and their potential for appreciation in value over a 7 to 10-year period and notes that leverage in the market is gradually returning to more typical levels, reducing the amount of equity required for investments.

Factors Affecting the Market: Interest Rates and Uncertainty

Interest rates, potential recessionary concerns and consumer confidence have all contributed to the market's uncertainty and the Federal Reserve's actions play a crucial role in shaping market expectations. The recent 25 basis point increase in interest rates indicates a potential moderation, but the future outlook remains uncertain. Inflation trends and market stability will influence whether rates hold flat, increase or decrease in the future.

Impacts on Underwriting and Capital Markets

The changes in interest rates and market dynamics affect underwriting practices and capital markets. Loan assumptions are still trading at a premium, but there has been a shift towards longer-term loans with a flexible prepayment buy-down option. Depending on the business plan and property location, loan terms are adjusted accordingly. Ryan mentions the importance of leveraging agency programs and the return of leverage in the market, which reduces the required equity. These factors enable investors to structure deals more effectively.

Buyer-Seller Negotiations and Pricing

There has been significant disconnect between buyer and seller expectations recently. However, the market has undergone a change, with the bid-ask spread collapsing by nearly 50%. The expectations of buyers and sellers are aligning more closely, resulting in more realistic pricing. The average cap rate in the first quarter of 2023 was around 5.3%, indicating a contraction of the bid-ask spread.

Operational Considerations: Expense Discipline and Financial Positioning

From an operational standpoint, there hasn't been much fluctuation compared to the previous year. The focus on expense discipline remains essential, especially for groups preparing for a sale. The emphasis on reducing expenses, such as payroll, has been instrumental in optimizing financial statements to maximize transaction value.

Key Takeaways:

- The multifamily real estate market is stabilizing, with vacancy rates increasing and rental growth moderating.

- Interest rates, recession concerns and consumer confidence continue to contribute to market uncertainty.

- The massive disconnect between buyers and sellers expectations that was prevalent in the past is beginning to diminish. The spread between initial offers and final pricing has decreased, with cap rates decompressing.

Are you REady2Scale Your Multifamily Investments?

Learn more about growing your wealth, strengthening your portfolio, and scaling to the next level and visit www.bluelake-capital.com.

To connect with Jeannette & her team directly & find out how to invest alongside Blue Lake, email them at [email protected] or just complete our potential investor form at https://www.bluelake-capital.com/new-investor-form and they'll be in touch with you.

If you'd like to be on our podcast or know someone who should, visit https://www.bluelake-capital.com/podcast and click the link to submit a guest.


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