Riding the Multifamily Wave: Insights in a Shifting Landscape

In today's fluctuating economic environment, many investors have given pause to better understand how they feel about the current state of the multifamily market. And while there are many headwinds for the multifamily sector and real estate as a whole, the long term fundamentals remain strong. When investors ask us about the state of the market, we often point to the long term fundamentals, because so many of our strategies have a longer term horizon and when you're buying right with a longer term outlook, the specifics on the current market conditions are less critical than if you enter a project with a short term exit strategy. However, for current portfolios and to keep all of our investors informed about their investments with us, we dive into the details of the current climate to help investors understand our return forecasts and expectations given the economic climate we find ourselves in. As we do every month, here are some of the key factors we are keeping our eyes on in today's market.

The Rise of Build-to-Rent (BTR)

The pandemic has ushered in a surge of interest in build-to-rent properties. With climbing interest rates and soaring home prices, many potential homebuyers are finding solace in the rental market. As of June 2023, over 700 BTR properties are under construction in the U.S., representing a significant growth of 52% between 2021 and 2022. Cities like Phoenix, Dallas, and Atlanta are leading the charge, with Phoenix alone accounting for nearly 20% of the total U.S. BTR units under construction.

The Sun Belt's Magnetic Appeal

The Sun Belt region, encompassing states from Florida to California, has emerged as a hotspot for multifamily development. Factors such as in-migration, job growth, and favorable weather are driving this trend. Texas and Florida, in particular, have successfully attracted companies, offering a lower cost of living and a robust job market. The BTR sector in the Sun Belt has benefited from this influx, with developers like EMBREY focusing on expanding their portfolios in the region.

The Federal Reserve's Stance and Its Implications

The Federal Reserve's "higher for longer" approach to interest rates is indeed making homeownership more challenging for many Americans. This stance, coupled with sticky inflation and net migration trends, is fueling demand for rental housing, especially in states with strong net migration. While some market players remain on the sidelines, possibly anticipating another economic shock, our focus remains on the fundamentals. Basis, location, and a strong balance sheet are the pillars of our investment strategy.

Key Market Indicators

Recent data from Redfin underscores the challenges and opportunities in the market. The typical U.S. homebuyer's monthly payment has surged by nearly 20% YoY, driven by a combination of rising home prices and elevated mortgage rates. The supply-demand mismatch is evident, with a 19% YoY drop in the total number of homes for sale. However, the demand remains robust, with Redfin's Homebuyer Demand Index down just 4% YoY.

Conclusion

The multifamily market is at an inflection point. While challenges persist, the fundamentals of the market present unique investment opportunities. As your fund manager, our commitment is to navigate these complexities, leveraging our expertise to identify and capitalize on the most promising multifamily investment opportunities for our investors. The future may be uncertain, but with a strategic approach grounded in market realities, we are well-positioned to thrive.

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