The Case For Multifamily Investing in 2024

there's no denying that multif family real estate is under a lot of pressure right now with incoming Supply at some of the highest levels we've ever seen increases and operating expenses that have resulted in material hits to property nois and a lot of investors struggling with floating rate loans that at today's interest rates they just can't service but the fact that these things are all happening right now is exactly why this could turn out to be one of the best buying opportunities we've seen in this sector for both investors and industry professionals looking to land

a job in multif family real estate and in this video I want to break down the key reasons why the rest of this here could come with some huge opportunities in this part of the industry and the main things that are driving these changes in the market so the first positive indicator of things moving in the right direction in the multif family sector today is that new construction starts are starting to drop substantially according to data from the US Census Bureau from May new privately owned housing unit starts on five plus unit properties dropped from

575,000 units in May of 2023 to just 278,000 units in May of 2024 marking a 52% year-over-year decrease in new development projects that would likely be delivered in the next 2 to 3 years and this is a consistent Trend that we've seen over the last year with new construction starts dropping as low as 251,000 units in March of this year with the cost of debt financing pushing a lot of developers to either pause or cancel their projects altogether and the influx of new Supply that we're seeing delivered in the market today is making it really

tough to underwrite any significant rent growth that could make up the difference when analyzing these deals according to the chief Economist at real page 12 of the largest 50 US metros saw Zero new construction starts in the second quarter of this year and even markets like Austin Denver Raleigh Durham and Salt Lake City which have seen massive Supply growth over the last few years each saw fewer than 500 new unit starts in Q2 of 2024 and while right now we're seeing a huge oversupply of new deliveries driving down rental rates in a lot of markets

across the country with deliveries expected to peak in the third quarter of this year according to new Mark research and many of the markets that are seeing the highest number of delivery of completed apartment units today also being the markets that have seen the biggest population growth over the last 12 to 24 months it's very likely that most of this new Supply will be absorbed relatively quickly and when deliveries start to fall and this new product is leased up rent growth is likely to pick back up in a very big way and when you combine

this with home prices that have risen by almost 42% over the last 4 years and 30-year mortgage rates for many borrowers across the country at over 7% interest rates a lot of wouldbe homeowners are becoming renters by necessity right now and even for those that could buy today this is becoming less and less of a path that people are choosing to take with the spread between the monthly cost of home ownership and the monthly cost of renting an apartment growing to $824,500 to pay for monthly housing costs this requires an income of over $105,000 to

keep monthly housing cost below 30% of a homeowner's pre-tax pay and at the same time that we're starting to see these positive future supply and demand Dynamics a lot of current multif family owners are at a point where they just can't hang on until these Market Tailwinds kick in and with a significant number of multif family loans maturing over the next 2 years this is fin finally resulting in distress beginning to materialize as of q1 of this year $669 billion of multif family loans were scheduled to mature between 2024 and 2026 and with 38% of

2024 maturities being financed between 2020 and 2021 when the one month Sofer was near zero and the 5-year us treasury rate dropped to just 19 basis points in the summer of 2020 many of these investors bought these properties at price points that only made sense at these record low interest rates and when these properties need to be refinanced or sold at the end of the loan term with cap rates that are anywhere from 200 to 300 basis points higher than they were 3 years ago in interest rates that are 400 to 500 basis points higher

than they were at that time a lot of borrowers are going to find themselves in a position where new loan proceeds just can't pay off their existing loan balance which will likely lead to a lot of force sales just to make the lender whole and even for properties that don't have a loan maturity coming up many of these owners are starting to see distress come directly from operations and according to recent data from the debt tracking firm cred IQ 7.4% of multif family cnbs loans were delinquent or in special servicing at the end of June

of 2024 which is more than double the 3% figure we saw just 6 months prior to this at the start of this year and between Property Owners not being able to service their debt and $155 billion of multi family loans that were originated between 2020 and 2021 being scheduled to mature over the next 2 years this could create a huge influx of newly marketed properties for sale and huge opportunities for discounts that even over the last 2 years have been relatively few and far between now in addition to positive future supply and demand Dynamics and

distress related to financing there's also a relatively High likelihood that we could start to see interest rate Cuts as early as the third quarter of this year which could have a few positive effects for multif family buyers today and the first is that if interest rates drop in most cases this is going to mean that investors can pay more for those same properties which leads to reductions in cap rates all else being equal a lot of the value drops that we've seen in the multif family sector over the last 2 years have been almost entirely

due to the rise in cap rates as a result of interest rate spikes leading to reductions in property values of 20 to 30% or more in a lot of cases and this has even been true at properties where operating income has stayed constant or even increased slightly during this time and by making an acquisition today ahead of potential rate Cuts investors are very likely going to see a positive swing in values in relation to those cap rate Chang es without having to do anything to the property's operations and because the FED is primarily waiting for

inflation to come down before making these cuts a drop in interest rates also very likely means that the huge increases in operating expenses that multi family owners have seen over the last few years primarily related to things like Insurance costs labor costs and material cost will finally start to slow down making it a lot easier for property owners to increase net operating income and ultimately property value a drop in interest rates will also often spur economic activity overall which could lead to increased wages job growth picking up and ultimately more disposable income for people to

spend on rent and while this is all good news for investors if you are trying to land a job in this part of the industry today either at a multif family investment firm or brokerage team focused on this sector this could also mean that your career prospects are finally starting to look up if interest rates and at the same time transaction activity takes up due to distressed properties hitting the market transaction focused job openings in Acquisitions and investment sales should also start to pick up quickly especially since many multif family firms have kept their teams

as lean as possible over the last few years ultimately while a lot of multif family owners are in a tough spot right now there's a very good chance that we could look back on the second half of 2024 as a great time to buy and these are all things to consider if you're a multif family investor or looking to land a job in this part of the industry and if you are trying to break into commercial real estate right now and you want to make sure you have the technical skills you'll need to land an

analyst or associate role and pass an Excel modeling exam that might be given to you during the interview process make sure to check out our all-in-one membership trading platform breaking a CR Academy a membership to the academy will give you instant access to over 120 hours of video training on real estate Financial modeling and Analysis you'll get access to hundreds of practice Excel interview exam questions sample acquisition case studies and you'll also get access to the breaking of CR analyst certification exam which covers topics like real estate proforma and development modeling commercial real estate lease

modeling Equity waterfall modeling and many other real estate financial analysis Concepts that will help you prove to employers that you have what it takes to tackle the responsibilities of an analyst or associate at a top real estate firm and if you like this video and want to see more content on the channel on the current state of the multif Family Market make sure to hit the like button let me know and let me know in the comments what other product types you'd like to see covered in a future video on the channel as always thanks

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