By HFO Investment Real Estate
Research
Following partner meetings with
dozens of institutional multifamily owner groups at the National Multifamily
Housing Conference in San Diego last month, it appears the multifamily housing
sector is entering a period of cautious optimism in 2024. For the most part,
institutional owners, whose multifamily assets are typically valued at $20
million and up, feel the prices of multifamily real estate are finding their
floor. Key factors contributing to this outlook include better clarity on
interest rates, operational costs, and the balance between supply and demand,
suggesting a more predictable market landscape. There's also a growing
acceptance that distress among institutional-grade properties will be minimal,
with many issues likely to be resolved privately or through debt restructuring.
The financial dynamics of
multifamily properties are evolving. Expense growth is expected to surpass
revenue increases in some markets this year. Property values are approaching a
low-water mark, with capitalization rates stabilizing. These dynamics suggest a
cautious market, with big-ticket investors adjusting their expectations. The
cautious market is expected to keep joint venture and institutional equity
mostly sidelined, with the bulk of capital investment in housing this year
coming from family offices and private individuals. A surprising and
significant increase in expenses the rental housing market faces is a surge in
fraudulent rental applications. According to an NMHC report released in
mid-January, more than 70% of major apartment landlords report increased
applications, highlighting a growing and significant issue impacting
operational costs and market integrity. This trend complicates rental
management and contributes to higher costs, ultimately affecting availability
and affordability.
With loan rates and expenses
up, construction starts are declining nationwide, including throughout the
Portland metro. Most of the area's new apartments will be delivered this year,
and there is very little slated for completion in 2025 compared to other
markets in the western region. This decline in new construction is occurring
despite a critical need for more housing. A strong job market, increasing
wages, and growing consumer confidence further increase demand. With
completions up in the near term, the strategy of "heads on beds"
emphasizing occupancy over rent increases still reflects the competitive
landscape, with operators willing to adjust prices to maintain high occupancy
rates. However, that strategy will end as construction deliveries slow later
this year. CoStar Analytics is now forecasting that rent increases will begin
again in the fourth quarter of 2024.
The government at all levels
now appears serious about addressing the need for additional housing. Last
week, the City of Portland issued largely temporary "regulatory
relief" on 15 zoning and permitting requirements that take effect March 1.
At the state level, Governor Tina Kotek recently announced she would seek $500
million during the current legislative session for housing-related
infrastructure and land-use expansions. At the federal level, a new bill
introduced in Congress on January 31 would spend $300 million to enhance the
supply of affordable housing.
In summary, the multifamily
housing market in 2024 is navigating through a phase of adjustment and cautious
optimism. Demand remains strong, but the challenges of supply, construction,
and operational dynamics persist. The introduction of legislation to bolster
the affordable housing supply and the need to address fraud in rental
applications are critical aspects of the broader effort to stabilize and
improve the market for renters and investors.
HFO Investment Real Estate is celebrating its 25th year
in business. HFO offers brokerage and advisory services to multifamily owners in
Oregon and Washington. Call (503) 241-5541 or visit www.hfore.com to learn more.
