A storm is brewing.
Once clear skies, the forecast now calls for stormy weather ahead in the multifamily housing sector entering 2024. With an 18.5% market share, multifamily real estate is the largest among the six commercial real estate sectors.
Homeownership has grown out of reach for many Americans, and the demand for affordable housing has grown by leaps and bounds in the past decade, with supply struggling to keep up.
Let me tell you why.
Rising Commercial Interest Rates
In the last two decades, we have experienced commercial interest rates below 5%, and while many have forecast rising rates for several years, they never materialized until now.
There are now billions of dollars of loans about to reset at higher rates. Rents have not kept up with these increases, property values are down, and many operators will be in trouble.
Even though the Fed forecasts potential cuts in 2024, there is no guarantee that will happen.
The result will be flat or slightly declining rents for existing multifamily units. Many operators’ business plans were predicated on rents increasing at higher rates. They will now find themselves unable to execute their business plans.
What Happens From Here?
We will see many multi family foreclosures in 2024. This will happen because operators will struggle to meet higher loan payments. This situation will be especially acute with regional banks.
What do regional banks have to do with this?
2023 was not kind to regional banks. Five regional banks failed, with Silicon Valley Bank and Signature Bank being two of the most notable.
As a result, this whole sector of banking is on shaky financial ground and subject to heightened regulatory scrutiny. Regional banks won’t be able to accommodate operators struggling to repay loans.
Even if the Fed cuts rates, it will be too little, too late. In the absence of loan modifications, foreclosures are bound to follow.
Many inexperienced, undercapitalized, and overleveraged operators who gambled on high rents and low rates in the last few years find themselves in over their heads.
Even experienced operators who took conservative measures will be in distress because this type of shift was truly a black swan event.
This will open opportunities in 2024, 2025, and beyond for experienced operators and investors with capital available to deploy. Some will understand that this is a once in a lifetime opportunity.
Others will cower in fear.
Capitalized operators and investors should be poised to step in and take advantage of opportunities where others have failed.
“The time to buy is when there's blood in the streets.” -Nathan Rothschild, a 19-Century British Financier.
The key to wealth is to be well-capitalized and have the courage to pounce on great opportunities when they present themselves.
There are always opportunities for experienced operators who strategically and conservatively vet opportunities – even in the storms.
We are careful not to be swayed by unrealistic expectations and market aberrations.
Take Rothschild’s advice. Or, if you want more current advice, listen to mine:
“The time to buy is when the masses are running.” -Drew Kniffin, a 21st Century Investor.
Don’t sit on the sidelines and watch great opportunities pass you by in 2024. If you have a question or are interested in upcoming opportunities, please don’t hesitate to reach out.