The Federal Reserve’s cut in interest rate in September is undoubtedly fueling the multifamily real estate market judging from key market factors such as the increase in demand, shortage in supply and rising levels of asking rent. As rate cuts continue to do its job to stimulate market activities and boost transaction volume, the recalibrated multifamily market is poised to present unique opportunities for commercial real estate investors.
After all, the multifamily market has historically demonstrated resilience through economic downturns including the market uncertainty since the pandemic. Many factors can make the apartment properties a better investment target, but the gap in demand and supply is always a strong indicator. The current low vacancy rate and rent increase is upheld by a strong demand in the multifamily market while supply of new homes continues to lag behind. In a post pandemic world, more people working from home means more people need home spaces. The millennials and older Gen Zs are now forming new households and need their own homes. A sharp increase of working age immigrants settling down in the States exacerbates the housing shortage. Between 2012 and 2023, 17 million new households have been formed, but the country only added 13 million homes including 3.9 million multifamily units.
Sadly, after delivering 736,000 new apartments by the end of 2024, the market will see a gradual decline in new multifamily housing supply beginning in 2025, according to Federal mortgage company Fannie Mae.
Nationwide, the under-building relative to the increasing demand makes the multifamily market a desirable investment target. Strong job market and population growth in some metro areas are even more of an incentive for investors to make a move as the multifamily market begins to rebound.
“As investors look to drive capital in this recalibrated commercial real estate market, it is critical to structure financing in ways that not only facilitate the transactions, but also give investors additional ‘dry powder’ for operational costs or emerging opportunities to invest,” said Wendy Cai-Lee, Founder and CEO of New York-based Piermont Bank.
Such “dry powder” can take several forms in the current banking environment. Note-on-note financing and A-B note financing for commercial real estate funds are just two of them. For instance, banks like Piermont offer Commercial Real Estate fund investors an A-B position structured loan in which the bank is a senior lender taking the A position and an investor takes the B position.
Beyond traditional commercial real estate loans, this type of structured financing can enable investors to retain additional capital, allowing them to pursue more transactions in an active market. This approach is particularly impactful for middle-market borrowers with deals ranging from $5 million to $15 million, who often have less experience and liquidity compared to larger institutions. Piermont Bank, with its strong track record of lending to middle-market borrowers, is ready to up the game because many of its borrowers in this category have demonstrated resilience and maintained steady cap rates throughout the current multifamily real estate cycle, making them standout performers.
Cai-Lee advises investors to thoroughly research banks when selecting a banking partner. Some banks, already holding a significant concentration of commercial real estate loans, may still be dealing with non-performing assets. For those banks that are willing to lend, investors must remain vigilant to ensure that the agreed-upon lending terms are consistently upheld throughout the underwriting process.
“Although the multifamily market is resilient and appears promising, there are plenty of reasons to exercise caution,” said Cai-Lee. “Investors need to understand the market before making a move, especially when it comes to nuanced geo-markets where growth potential can vary from region to region.”
Across the country, some geographic markets are absorbing multifamily housing more effectively than others, and prospects for rent growth also vary by region. In certain metro areas, residential vacancy rates are below the national average, bolstered by strong local job markets. These standout metros include New York-Newark-Jersey City, Stamford-Bridgeport-New Haven, Philadelphia, Boston, Chicago, the greater Washington D.C. area, Dallas-Fort Worth in Texas, and Sacramento and San Diego in California.
In each of these regional markets, submarket nuances—such as demographics, crime rates, availability of community amenities, and the quality of local school districts—further influence pricing and transaction volumes at the neighborhood level. Investors should seek capital partners who are not only knowledgeable about these markets and the quality of assets to underwrite but also willing to work with innovative approaches and ready to deploy lending. Such banks can offer the strategic insights and financial support necessary to navigate these complex and varied markets.
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