As the multifamily sector continues to navigate turbulent waters, our commercial real estate group works hard to stay informed about both market trends and the legal implications that accompany them. In August, we have been focused on potential interest rate cuts, rising distress in apartment loans, and proposed housing policies from both parties. With a recession and an election looming this Fall, these August developments are likely to influence the multifamily landscape well into 2025. To spark discussion among our colleagues, clients, and friends in the multifamily sector, we wanted to share three top news stories and our team’s take on them. Our hope is that this digest proves useful and that we can continue to send these out in the months to come.
TOP STORIES FROM AUGUST:
TIME HAS COME: Interest Rate Cuts are on the Horizon
Federal Reserve Chair Jerome Powell signaled that the central bank is prepared to cut interest rates in September, focusing on protecting the labor market and attempting a soft landing. He did not specify the size of the cut, but most people are expecting a 25-basis point or even a 50-basis point cut. We don’t have to tell you all about how the high interest rate environment has sparked an almost 2-year recession in commercial real estate – in particular, multifamily – where development and transaction volume have slowed dramatically from their pandemic peaks. This policy shift towards rate cuts has been almost universally welcomed across the industry this month; however, it remains to be seen how quickly development and transaction volume can rebound with lower rates and just how much damage the protracted high interest rate environment has caused throughout the industry. Read more here.
FIX AND FLIP INVESTORS MAY BE IN SOME TROUBLE: Pressure Mounts on Apartment Owners as Loan Defaults Climb
Office gets all the bad headlines. However, this article from the WSJ makes it clear that fix-and-flip apartment investors who made speculative plays using floating-rate bridge CLOs during the pandemic are in trouble. “As most CLO loans are for three years, this vintage is now maturing.” In 2021, SOFR was ~0.05%. Today? ~5%. A 25-basis point or even 50-basis point interest rate cut by the Fed won’t be able to save a lot of these loans and investors. However, apartment foreclosures are low, and lenders appear to be more likely to perform workouts with these borrowers as opposed to the office sector, which is a credit to the continued strong underlying demand fundamentals in the multifamily space. Supply (or rather oversupply in some markets) is still a major concern in the multifamily space, but with multifamily starts and development plummeting, the supply today may be a high-water mark for this decade. Read more here.
POLITICIANS FROM BOTH PARTIES TRY TO FIX HOUSING: The Impact of Zoning Reform and the Real Role of Institutional Investors
Fundamentally, America’s housing shortage drives up prices in cities and towns across America, and both parties have similar and different ideas to fix this. Zoning reform has become a bipartisan issue in some states, as Democrats and Republicans both want to encourage more housing construction. However, both parties pick on "institutional investors" (with 1,000+ homes) as a boogeyman for the housing shortage, but, despite all the political noise, institutional investors only own a fractional share (~3%) of the single-family housing stock in America (credit to Bloomberg for pointing this out). Our clients in the BTR space are adding housing units to the housing stock – not taking them away, which this article from Bloomberg also highlighted. We expect the BTR trend to continue this decade as demand for the single-family product will remain high during an elevated interest rate environment that keeps renters in this product type. Read more here.
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