Mid-Priced Apartment Demand Soars Amid Economic Uptick

Plus: CoStar’s analysis shows a continued dip in CRE sale prices in October, aligning with the ongoing trend of increased rates.

Mid-Priced Apartment Demand Soars Amid Economic Uptick

Plus: CoStar's analysis shows a continued dip in CRE sale prices in October, aligning with the ongoing trend of increased rates.

Together with

Good morning. 2023 has brought a notable rise in multifamily market demand, particularly for three-star mid-priced apartments, rebounding from late 2022's slowdown. Concurrently, CoStar's analysis shows a continued dip in CRE sale prices in October, aligning with the ongoing trend of increased rates.

Today’s issue is sponsored by Reap Capital—an IRR-driven, vertically integrated value-added operator.

👋 First time reading? Sign up.

🎁 Want free merch? Share this.

Market Snapshot

S&P 500
GSPC
4,567.80
Pct Chg:
0.4%
FTSE NAREIT
FNER
696.26
Pct Chg:
0.7%
10Y Treasury
TNX
4.338%
Pct Chg:
1.6%
SOFR
1-month
5.31%
Pct Chg:
0.0%

*Data as of 11/30/2023 market close.

DEMAND COMING BACK

Leasing Surge in Mid-Priced Apartments with Improved Economy

Mid-Priced Apartments Attract Biggest Demand Boost

Apartments rated three stars, such as this garden-style complex in Plano, Texas, have seen strong demand from renters so far this year. (CoStar)

In 2023, the U.S. multifamily market has seen a significant upswing in renter demand, especially for mid-priced apartments rated three stars. This shift marks a recovery from a sluggish performance in the latter half of 2022.

A surge in demand: There has been a 77% increase in occupancy over the last year, with 260,000 more units being filled than vacated. This surge is primarily in mid-priced, three-star properties, contrasting with the disappointing absorption of only 146,000 units in 2022.

Influencing the market: The market slump in 2022 was driven by a combination of high inflation, increased oil prices, and recession fears, which significantly impacted consumer confidence and demand, especially in mid- and low-priced properties. This led to renters seeking more affordable housing solutions or delaying household formation.

Improving economy: The rebound in 2023 has been fueled by improved consumer confidence, lower inflation, strong wage growth, and reduced recession fears. These factors have notably increased the demand for three-star properties by 54,000 units in the first three quarters of the year.

➥ THE TAKEAWAY

Positive outlook: The high-end segment of the market, comprising four- and five-star properties, has remained stable, thanks to the lower rent-to-income ratio of its renter households. Looking ahead, if the economy avoids a recession, multifamily demand could return to pre-pandemic levels by 2024, although supply is expected to exceed demand for the third consecutive year.

A MESSAGE FROM REAP CAPITAL

Celebrating Major Asset Sales and New Investments in Uncertain Times

"Bad companies are destroyed by crisis, good companies survive them, but great companies are improved by them." In a market plagued by widespread loss, Reap Capital has not just survived but thrived, having achieved an average 23.64% IRR on two 2023 dispositions held for only two years.

These successes are testaments to Reap’s operational excellence and effective asset management. After reviewing over 240 deals this year, Reap has found the fire sale they have been waiting for, possessing all the right attributes: total loss of equity, foreign ownership self-managing, loan maturity, expired rate cap, and alpha return metrics.

Closing in December, Reap will have acquired nearly $90m in assets this year. Sign up to get access to deals!

TRENDING HEADLINES

  • Cool cash: Lineage Logistics, a major owner of cold storage real estate, plans to go public in 2024 with a potential valuation of $30B.

  • Empowering everyone: Deregulating CRE supports mixed-use neighborhoods, wealth, and taller buildings, akin to YIMBY's residential focus.

  • Surprising success: Mortgage REITs in 2Q23 experienced a nearly 80% increase in loan repayments, resulting in a 2.5% reduction in their collective portfolios to $92.67B.

  • Housing retreat: NY Governor Hochul abandons a controversial housing legislation in favor of pursuing other solutions due to significant opposition.

  • The price of paws: Blackstone (BX) will acquire pet care app Rover (ROVR) for $2.3B in an all-cash deal, with shares of Rover climbing 28% on the news.

  • Really, really dumb: The strip mall investor that published the 11th hour press release to buy out WeWork (before pulling it) has been accused of manipulating shares and misusing client funds.

  • Seismic shake-up: Fledging AI technology is estimated to disrupt up to 80% of all jobs, including in CRE, according to CoStar.

  • Refinancing success: Hines secures a $300M refinancing deal for CityCenterDC, a major mixed-use complex in Downtown DC with 500 KSF of office space.

  • Falling flat: Multifamily lending has dropped 55% YoY by Q3, with loan originations down 33% since 2Q23.

  • Revolutionizing healthcare: Mayo Clinic plans a $5B redesign of its Rochester campus, creating "health neighborhoods" for streamlined patient care.

  • Very disappointing: California startup Veev, known for its modular construction technology, faces shutdown due to a failed capital raise, blaming ongoing market challenges.

  • Black Friday bounce: Black Friday online sales reached $9.8B, a 7.5% increase YoY, while in-store and e-commerce sales rose 2.5%.

  • Industrial expansion: Invesco Real Estate (IARAX) partners with Faropoint to expand its industrial portfolio into last-mile warehouses, acquiring a minority stake in the platform.

  • Loan lessons: In 2023, a new loan for the 11 West 42nd Street property was secured, totaling $330M, with an interest rate of 7.44% and an annual debt service payment of $20.4M.

SALES SLUMP

High Borrowing Costs Weigh on Property Prices

CRE sale prices in October saw a decline consistent with the yearlong trend of higher rates, according to an analysis by CoStar.

Market trends: CoStar’s analysis utilized two key indices: the Value-Weighted U.S. Composite Index, focusing on large property sales in major cities, and the Equal-Weighted U.S. Composite Index, representing smaller, less expensive property deals. Both indices reported significant declines. The Value-Weighted index fell by 1.4% from September, marking an 8.7% decrease over 12 months. Similarly, the Equal-Weighted index dropped by 1.4% in October, showing almost no change year-over-year.

Influenced by interest: Chad Littell, CoStar’s national director of U.S. capital markets analytics, attributed these trends to fluctuations in the U.S. 10-year Treasury yield, a crucial benchmark for commercial real estate lending. With the yield peaking at 4.9% in October, the highest for the year, Littell predicts continued pressure on prices and a likely decrease in transaction volumes through the fourth quarter.

Hitting the brakes: The downturn varied across different market segments. Investment-grade properties saw the most significant decline, with a 60.3% drop in transactions and the largest year-over-year price decrease since March 2010. The multifamily sector also experienced substantial declines, with the value-weighted multifamily index dropping 19.8% since its peak in July 2022.

Slippery slope: Investment-grade prices took a big hit in October, the largest YoY drop since March 2010. The equal-weighted index for investment-grade assets slipped 1.5% in October and fell 12.1% over the past 12 months. The general commercial sub-index, consisting of smaller, lower-priced assets, slipped 0.9% in October but showed modest gains of 3.1% over the 12-month period.

➥ THE TAKEAWAY

Higher yields, lower expectations: The surge in the 10-year Treasury rate to 4.9% in October has led to a downturn in commercial real estate (CRE) sale prices, a trend that's expected to continue due to increased borrowing costs. This rise in yields is particularly impactful on the investment-grade property segment, which is facing the most significant price declines.

QUICK HITS

📖 READ: You’re probably tired of hearing about the doom and gloom surrounding work-from-home trends and tight credit availability. The good news is there are finally signs of improvements on both fronts.

🎧 LISTEN: Reg Zeller, founder and CEO of CaneKast, a company innovating on small manufacturing, talks about how to make US manufacturing great again on this episode of The Fort.

CHART OF THE DAY

In a comprehensive study of debt fund returns since 2013, the average return of 10.8% was nearly met, achieved, or exceeded by the vast majority of these funds. Notably, smaller debt funds with raises up to $1.5B tended to outperform, while larger funds were more likely to meet or fall slightly below the average return.

What did you think of today's newsletter?

Login or Subscribe to participate in polls.

Latest NEWSLETTERS
View All
Foreign Investment in US CRE at Lowest Point Since 2011
June 14, 2024
READ MORE
U.S. Asking Rents Climb for Second Consecutive Month in May
June 13, 2024
READ MORE
Arbor Realty Trust’s Big Short Struggles to Deliver
June 12, 2024
READ MORE

Back to top