Persistent High Interest Rates
Despite a slowdown in inflation, interest rates are expected to remain high, with the 10-year Treasury yield likely staying within the 3.50% to 4.50% range. The bond market dynamics, including low demand at U.S. government bond auctions, suggest that long-term interest rates may stay elevated.
The Likelihood of a Recession
While a 2023 recession was anticipated but didn't materialize, 2024 might see a different turn. Consumer spending resilience and a robust job market have deferred the recession, but with the presidential election year possibly prompting economic stimulus measures, a mild recession in late 2024, deepening into 2025, appears probable.
Strong Fundamentals in the Multifamily Market
Despite economic uncertainties, the multifamily market is expected to maintain its strength. The significant discrepancy between buying and renting, coupled with low housing supply and high mortgage rates, keeps the demand for apartments and rental homes robust. This scenario is likely to persist for years, underpinned by preferences for larger living spaces due to hybrid work models.
Slowdown in New Multifamily Development
Challenges with lending and a potential rise in defaults on expiring floating rate debts are likely to curb new multifamily developments. The lower volume of commercial mortgage-backed securities issuances signals a notable decrease in new apartment developments.
Correction in Multifamily Asset Valuations
After experiencing a 15% to 30% drop, multifamily asset valuations are expected to decline further by about 10% in 2024. This adjustment stems from stagnant or low rent growth and rising operating expenses, such as wages and insurance. This situation presents a valuation problem, especially for owners with variable-rate loans due in 2024.
Stabilization of Rent Growth
Rent growth is expected to normalize to historic averages of 2% to 4% by late 2024, aligning with pre-pandemic levels. This trend will be a recovery from the negative rent growth observed in some markets in 2023.
Emergence of Distressed Multifamily Assets
With many variable-rate bridge loans maturing in 2024, a wave of distressed multifamily assets is anticipated. This situation presents significant opportunities to acquire quality value-add properties below replacement costs.
Home Price Corrections
The housing market is poised for a correction, starting in Q3 2024. Factors like high interest rates and rising insurance costs, which have fed the demand for build-for-rent housing, are expected to gradually lead to an increase in the supply of homes for purchase.
Persistently High Insurance Rates
The trend of high insurance rates, propelled by weather-related disasters and rising replacement costs, is expected to continue. These elevated rates will impact various aspects of property ownership and management.
Industry Consolidation
A consolidation trend within the real estate investment industry is likely, with larger firms acquiring portfolios from smaller entities. This trend mirrors the post-Great Recession era, where investment capital flowed predominantly to the largest providers.