While many commercial real estate sectors face challenges, multifamily properties are experiencing renewed investor interest, driven by high mortgage rates and increasing single-family home prices.

A Comeback

Investor confidence in office, retail, and industrial real estate has waned, but multifamily is gaining momentum. According to Altus Group’s Q3 2024 U.S. CRE Survey, 69% of investors believe multifamily will outperform other sectors, largely due to constrained housing supply and difficulties in the single-family market. However, multifamily transactions are still about 35% lower than pre-pandemic figures.

Stable Absorption

Sun Belt regions like Phoenix, Dallas, and Atlanta saw a 20% increase in multifamily completions last year, but strong absorption rates—exceeding 90%—have alleviated concerns about oversupply. In areas like the Northeast, Midwest, and West, where construction has been slower, occupancy rates are even higher, reaching up to 95%. With pending home sales down 13% year-over-year, demand for multifamily housing continues to grow as more potential homeowners are priced out of the market.

Improved Financing

The October 2024 NMHC survey reports better conditions for sales, equity, and debt financing, with all indices exceeding 50. Debt availability has risen, supported by a 28-point decline in the 10-year Treasury yield and a 50-point Federal Reserve rate cut. Equity financing has also reached its most favorable point in over two years.

Looser Conditions

NMHC’s Market Tightness Index has remained below 50 for nine consecutive quarters, standing at 37. Although market conditions are looser, absorption rates have kept pace with supply, with 40% of respondents now viewing the market as looser, compared to 27% in July. Despite elevated levels of multifamily deliveries, strong rental demand is absorbing much of the new inventory, signaling continued resilience in the sector.

The Takeaway

Despite softer market conditions and increased vacancies, multifamily investors see potential in improved financing and sales environments. The sector’s adaptability and sustained demand indicate that rental housing is not just a passing trend but a long-term shift in housing preferences.