Multifamily Gains Momentum Amid Lower Debt Costs, Higher Cap Rates

Multifamily activity is rebounding as lower debt costs and higher cap rates attract sidelined capital, per Marcus & Millichap's Q3 report.

Jordan B. & Han-Gwon Lung
September 30, 2024

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Good morning. Multifamily activity is rebounding as lower debt costs and higher cap rates attract sidelined capital, per Marcus & Millichap's Q3 report.

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MARKET REPORT

Multifamily Gains Momentum Amid Lower Debt Costs, Higher Cap Rates

According to Marcus & Millichap's Q3 2024 report, the multifamily market is picking up steam as financing challenges ease and cap rates rise, unlocking sidelined capital.

A new high: Between July 2023 and June 2024, multifamily cap rates climbed to an average of 5.8%, marking the highest level since 2014. This 110-basis-point increase from 2022's low has helped stabilize sale prices, allowing buyers and sellers to come to terms more easily due to improved financing conditions.

Holding steady: National vacancy rates remained flat in the first half of 2024 after a 90-basis-point increase last year. Major metro areas, particularly downtowns, have shown the most resilience. Institutional investors are also re-entering the market, as seen by rising transaction volumes in July and August.

Supply pressures: While markets like Chicago, Milwaukee, and Pittsburgh benefit from limited inventory expansion below 2%, mild supply pressures remain, especially in non-Sun Belt regions. With nearly 1 million units under construction, these pressures will likely persist, even as multifamily project starts and permits show year-over-year declines.

Staying competitive: 14.1% of apartments offered concessions as of August 2024, up by 500 basis points compared to the previous year. Class B and C properties continue offering discounts, while Class A concessions have stabilized. Annual rents grew by 4% for lease extensions, highlighting renter preference to renew rather than navigate the challenging homeownership market.

➥ THE TAKEAWAY

Big picture: As lower debt costs and rising cap rates breathe new life into the multifamily market, investors are seizing opportunities, but sustained supply pressures and rising concessions could keep market players on their toes in the months ahead.

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✍️ Editor’s Picks

Top markets: Seattle-Tacoma remains the top-performing commercial real estate market, according to Trepp, while Hartford, CT, joins the worst-performing list due to office sector struggles.
Exclusive dining: Flyfish Club, NYC's first NFT-based members-only restaurant, has finally opened after raising $14 million, offering fine dining to those who bought in early with cryptocurrency.
Inflation gauge: The Fed's preferred inflation measure, the PCE price index, rose 2.2% year-over-year in August, its lowest level since early 2021, signaling the potential for further rate cuts.
Arena expansion: Philadelphia's $1.3B 76ers arena project in Center City will include over 1,100 residential units, retail spaces, and hotel rooms, with construction slated to start in 2028.
CRE gains: UBS Chief Economist predicts a prolonged low-inflation environment with gradual rate cuts, benefiting CRE, but warns that remote work and automation are reshaping office space demand.
A win for Cannabis: A judge ruled in favor of Innovative Industrial Properties, dismissing investor claims of ignoring tenant fraud, citing mismanagement rather than securities violations.
Price growth: U.S. commercial real estate prices grew 0.2% year-over-year in August, with industrial properties leading at 6.9% growth, while CBD office prices saw the steepest declines at 27.4%.

🏘️ MULTIFAMILY

Delays: Despite improvements, 52% of apartment construction projects still face delays, and multifamily starts have dropped 37.1% year-over-year.
Student housing: Vesper Holdings acquired Gateway at Denton, a 696-bed student housing property serving the University of North Texas, with plans for a $4M renovation.
Job gains: Revised employment data shows job growth in the top 10 U.S. markets slowed, with a 2.3% drop from last month, as overall employment figures were adjusted downward.
Boston buy: Carmel Partners secured $137M in financing for its acquisition of LUKA on the Common, a 396-unit multifamily property in Downtown Boston, marking the market's highest-priced deal in over a year.

🏭 Industrial

Oversupply: The post-pandemic warehouse boom in New Jersey and Eastern Pennsylvania has led to an oversupply, with over 32 million square feet now available for sublease.
Hialeah buy: Alliance HP made its first acquisition in Miami-Dade by purchasing a 101,685-square-foot industrial site near Hialeah for $24 million, marking its expansion into the local warehouse market.
Expansion: Compass Datacenters invests an additional $300 million in its Red Oak, Texas campus, adding three new facilities and expanding its growing data center footprint in the rapidly developing area.

🏬 RETAIL

Mall makeovers: Several Chicago-area malls are undergoing redevelopment, with local governments and private investors aiming to transform struggling properties into mixed-use developments.
Market entrance: Mehran Realty Group signed 99 Ranch Market to a 44,000-square-foot lease at 37-11 Main Street in Flushing, marking the West Coast-based Asian supermarket chain's first New York City location.

🏢 OFFICE

Employment growth: Office-using employment in the U.S. grew 6.1% above pre-pandemic levels in Q2, but rising unemployment may dampen future office demand.
Bankruptcy filing: R&B Realty files for bankruptcy on two Midtown properties, blocking Lightstone Capital from collecting debts after allegations of misappropriating funds from a $52M loan.
Buying spree: Tidewater Capital continues its office buying spree in Sunnyvale, acquiring a three-building campus for $65M, following a $100M purchase of a nearby tech campus in June.

🏨 HOSPITALITY

Settlement: Bill Fuller and partners secured a $12.5 million settlement from the city of Miami after alleging a politically motivated crackdown on their Little Havana venues, including the Ball & Chain bar.
DFW rebound: Despite cautious hotel investment in 2024, experts predict that rate cuts and stable lending will drive significant growth in the DFW hotel market by 2025.

📈 CHART OF THE DAY

In 2025, CRE companies are eyeing residential, industrial, and alternative sectors for capital deployment, with anticipated improvement in market conditions, especially in financing and leasing—though office spaces remain a concern.

FACT OF THE DAY

Did you know the Willis Tower (formerly Sears Tower) in Chicago has over 16,000 windows? Cleaning all of them takes a team of workers about nine months to complete—by the time they’re finished, it’s time to start again.