- Small multifamily valuations began to rise again in Q3 and Q4 of 2024, signaling market stabilization.
- Loan origination volumes increased by 5%, reaching $46.7 billion by the end of 2024.
- Rising interest rates and cap rates are making investors more cautious, though the demand for affordable housing supports market stability.
- Occupancy rates reached 97.5%, indicating strong demand despite ongoing construction activity.
- Expense ratios decreased, improving property-level efficiency.
The US small multifamily market is starting to show signs of recovery, according to a recent analysis by Arbor Realty Trust.
Indeed, after several quarters of declining valuations, small multifamily property valuations rebounded in Q3 and Q4 of 2024.
Valuations Are Rebounding
Small multifamily property valuations rose again in late 2024, following declines in prior quarters. Arbor notes that despite a 2.1% YoY drop in asset valuations in Q4, the pace of price decreases has slowed down.
For instance, Q4 saw valuations inch up 0.7% from the previous quarter. These improvements suggest the multifamily market may finally be stabilizing as price decreases slowed significantly over the past three quarters.
The demand for affordable workforce housing is one of the key factors supporting the stabilization. The need for affordable housing remains strong nationwide, and the small multifamily market is expected to continue benefiting from this trend.
Near Pre-Pandemic Levels
Loan origination volumes were also up by 5% over the same timeframe. However, rising interest rates and changing monetary policies could pose challenges to continued growth in 2025.
While loan production in 2024 did not reach the heights of 2022, it was still close to pre-pandemic levels. In 2024, multifamily lending hit $46.7B, strong performance compared to the pre-pandemic average of $50.5B between 2015 and 2019.
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However, higher interest rates have dampened cash-out refinancing activity, which dropped from 75.6% of total loans in 3Q22 to 68.4% by the end of 2024.
Despite the drop in cash-out refinancing, Arbor notes overall lending volumes are still healthy, reflecting optimism in the sector, even though interest rates remain a concern.
Cap Rates and Debt Yields
Cap rates for small multifamily properties averaged 6% in Q4, slightly up from Q3 and a 40 bps rise compared to the broader multifamily sector’s average of 5.6%. Since 1Q23, cap rates have risen by 108 bps, signaling more caution in the market.
Rising debt yields, in addition to higher cap rates, have caused lenders and investors to adopt a more conservative stance. Loan-to-value ratios also dropped in response to these higher cap rates.
Rising Occupancy Rates
Despite the challenges posed by rising interest rates, the small multifamily market is showing other positive signs.
Occupancy rates for small multifamily properties increased by 11 bps YoY to reach 97.5%, suggesting the market is absorbing the additional inventory created by elevated construction rates in previous years.
Expense ratios also improved in Q4, dropping to 41.0% from 42.6% a year earlier. This indicates that property-level expenses are growing at a slower pace than incomes.
Stability Amid Uncertainty
Although interest rate volatility poses a risk to the small multifamily market’s recovery, Arbor believes the sector is positioned for stability due to the enduring need for affordable housing.
Slower price drops, combined with rising occupancy and improving lending volumes, indicate that the multifamily market is moving toward normalization after several turbulent years.
As long as demand for affordable housing remains strong and interest rates stabilize, the small multifamily sector will likely maintain its stability in 2025.
