It was great connecting at the NMHC event last week! Here are a few key points that we will be focusing on in 2023:
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For multifamily investments, it is going to be a slow start for 2023 and unlikely we will see many trades in the first half of the year. The gap between buyers and sellers is still immense. Buyers are seeking deals at prices that reflect the new borrowing costs, yet most owners are still reluctant to sell at a discount to values from the height of the market last spring. That said, debt is improving, and fixed rate loans are coming down—so we are optimistic to see activity pick-up in the second half of the year.
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Some distress will be experienced by select sponsors who invested in assets with high leverage bridge loans or floating rate debt with wide interest rate cap strikes over the last couple years. As loans mature, some sponsors may lack the equity needed for cash-in refinances to salvage highly levered deals. Additionally, some sponsors lack the liquidity required to purchase today’s replacement interest rate caps, which now cost up to ten more times than they did when initially purchased.
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Despite the inevitable challenges on the horizon, there is plenty of capital waiting on the sidelines to be injected into the market as the pricing gap between buyers and sellers realigns. Institutions are sitting on funds that need to be invested and if assets are priced realistically in this market, there is a wall of capital waiting to be deployed.
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Rents are still showing healthy increases across the majority of markets, albeit we are not seeing the 10% to 15% surges witnessed a year ago. Following a very slow second half of 2022, leasing traffic has picked up and is expected to normalize back to the traditional 3% to 4% range.
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Expense control and efficiency will precede heavy value-add strategies. Proforma numbers must be modified to reflect appropriate underwriting assumptions incorporating massive annual increases in insurance and property taxes, and tempered rent-growth projections.
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Staying ahead of vacancy to limit resident turnover will be important this year. Understanding the nuances and utilizing the most effective resources within each rental market is key and offering tenant concessions will be a valuable strategy to maintaining retention.
