Multifamily Martket Update

Mid-Year 2023

We were hoping the first half of the year would exceed expectations since the bar was low starting the first of the year… this did not happen. The high interest rate environment has wreaked havoc on the transaction markets and the adjustment period between Buyers and Sellers has still not stabilized. It appears that the pause in interest rate hikes and eventual downward trend has been pushed back, stalling any sort of quick bounce back toward the activity we saw in 2021—2022.

Until we get some relief from these higher rates, cap rates will continue adjusting upwards and property values will continue declining. In addition to this there are other challenges the CRE industry faces, i.e. large increases in property taxes and insurance, increased bad debt, and slowing rent growth.

It looks like 2023 will end up being the transition year, where the CRE industry adjusts to this new higher interest rate environment.

Looking Forward
We expect the 2nd half of this year to be more of the same with regards to sales activity “slow”, but thinking the pipelines for new transactions will get better toward the end of the year, setting us up for a better start to 2024.

In the meantime, while this adjustment period plays out, most owners are focused on operations and less concerned about Buying or Selling unless that “right opportunity” comes along. Those owners who have debt coming due will have their hands full trying to find replacement debt or facing the hard fact of bringing in additional equity or maybe selling in today’s market. On the buy side of things, there are still plenty of active Buyers who are looking for opportunities albeit with more conservative underwriting and revised expectations. Developers also face challenges as financing is much harder to get, pushing back many planned development deals.

Not everything is bad, there is still good news looking forward. Texas and the metroplex still lead the country in fundamentals with healthy job growth and continued inward migration that should keep apartment demand intact and stable.

Multi-family is still the preferred asset type and the metroplex is still the place to be.

Podcast Episode-Do we have too many PILOTS and not enough PASSENGERS?

Are there too many general partner syndicators and not enough investors? Within the last 10 years…we have observed a lot of apartment transactions closed with the syndication investment model. As you know, a syndication model is like flying in an airplane. Pilot and passengers both perform critical roles to make a flight successful. The pilots are in the front of the airplane- they are the general partners- they are putting the deals together and making the operational decisions. The passengers in the back of the airplane… they are the limited partners. They are the investors in the deals that bring the bulk of the equity. Today, we have too many pilots and not enough passengers. We need more passengers (equity investors) to run a successful airline (apartment syndication.) Listen to the investment sales team at Rowan Multifamily Advisors in Dallas. They chat about recently closed transactions and why investors are buying or selling.

DFW Multifamily Market Update-January 2023

A Recap of 2022 & What We Could Be Facing in 2023

2022 was going to have a hard time keeping up with the record performance of 2021 but we had a great start to the year, which ended up as a tale of two stories. The days of low interest rates, record transaction activity, too much capital chasing too few deals, record prices and a market with more demand for housing than supply, seemed to be in the rear-view mirror as the year progressed. It didn’t take long to realize that inflation was not transitory and that the Fed was going to have to increase interest rates to bring inflation in. What was not expected is the rate at which these increases would take place and toward the end of the year it became obvious that these rate increases were going to have a profound impact on CRE. Prior to the rate increases, many Buyers had committed to floating rate bridge loan debt with short maturities, which is still playing out. The amount of inventory now outpaces demand resulting in an increase in vacancy and a tapering off of the double-digit rent increases that were driving the market.

It takes time for the market to digest these changes and it appears as though many investors are taking the “wait and see” approach to future investments, hoping for a little more clarity as we move in to 2023.

2023 will have a much more cautious outlook for most, and the consensus seems to be less activity for both Buyers and Sellers in 2023. Having said this, multifamily is still the “darling” of real estate investments and DFW is still at the top of everyone’s list. Texas has so much to offer, and the latest statistics show that employment grew by over 5% in 2022 as we added over 650,000 jobs to the labor force, more than double the historical average. North Texas faired even better with 5.9% growth and over 230,000 jobs added to the labor force. For perspective, Texas far outpaced any other state in the country.

The wild card is whether or not we enter a recession and how long and deep. Most think any recession will be shallow and short lived and that activity in the 2nd half of the year will start to pick back up. The party’s not over yet, as Texas has too many good fundamentals in place that will fuel continued growth.