Hi All - Happy Friday. It’s the last day of the month, which means it’s time for the Last Cast Letter.

What in tarnation is going on in the multifamily sector right now? Here’s other people’s thoughts mixed with our own. We hope you like it.

A Bearish First Impression

If you take a quick glance at the multifamily sector right now, you might not like what you see. 

High interest rates, elevated insurance costs, an increased focus on tenant rights, and general economic uncertainty have caused multifamily transactions to hit their lowest level since the pandemic. 

In Q1 of 2024, just 1,040 apartment properties changed hands at a value of $20.6 billion, a 25% decline from the same period last year. For context, this is the first time quarterly apartment transactions have dipped below $21 billion since the first quarter of 2014. No bueno.  

A lack of investor enthusiasm in this sector isn’t overly surprising. 

• The value of mortgage debt on multifamily residences in the United States has risen significantly in recent years. Last year, outstanding multifamily mortgage debt approached $2.2 trillion, comprising about ten percent of the total mortgage debt, according to Statista.

• According to the Mortgage Bankers Association, nearly $2 trillion of the $4.7 trillion in commercial real estate loans nationwide will mature over the next three years. CBRE anticipates that most of these loans will be extended, though some forced sales are expected as lenders lose patience or borrowers default. 

• As CBRE notes, “Loan defaults will be concentrated in office, which suffers from high vacancy and lower demand, and in multifamily, where many investors who financed acquisitions at ultra-low interest rates face significantly higher debt servicing costs as loans mature.”

• To top it all off, a new wave of supply will hit the markets in the next two years. Again, from CBRE: “The biggest wave of new apartment supply in decades will temper rent growth... With delivery of 440,000 new units expected in 2024 and more than 900,000 currently under construction, the overall vacancy rate is expected to rise and rent growth to decelerate.”

It’s tough out there, folks. But maybe in a few years we’ll look back at this rough stretch, and be like, “damn, I wish I bought more in 2024.” Some of the biggest names in the game are suggesting you should do exactly that.

“When Fear is A Friend”

While others are shying away from the multifamily sector, global investment firm KKR is leaning in. 

In their recent article, “When Fear is a Friend”, KKR believes that the fear and uncertainty keeping many away could actually present an opening for savvy investors. As we titled this piece, other’s anxiety could actually be an opportunity.

As the value of multifamily properties continues to fall and more pressure mounts on owners to sell assets, this creates an interesting entry point for investors with dry powder (and a set of cojones). 

Despite sluggish deal flow, we might be witnessing a potentially lucrative period for buying high-quality properties below replacement cost with attractive long-term yields. 

Multifamily bears believe that the sector is seeing a downturn akin to the office sector. They cite similarities in defaults and low transaction volume. 

KKR disagrees with that view entirely for the following reasons: 

• The US multifamily sector is cyclical, and the current challenges are part of regular economic cycles.

• Unlike much of the office sector that’s fallen into disuse due to remote work, housing will always be essential.

• Despite new supply coming online, another pronounced shortage is expected in 2026.

• Demand is still high, with a recent NAHB Multifamily Occupancy Index coming in at 83 for the first quarter of 2024.

Great, so you want to be like KKR and buy what they perceive to be the “dip”. Where do you do that? You know the answer…

Location, Location, Location

If you’ve followed along since our first Last Cast publications, you know we are interested in very specific neighborhoods where there is a supply/demand imbalance combined with favorable long-term economic drivers. 

• These include but aren’t limited to a low unemployment rate, job growth, high median household income, robust start-up culture, public and private investment in infrastructure, access to healthcare, job diversity, proximity to colleges and universities, proximity to unique outdoor amenities (mountains and oceans), etc.

Although it’s certainly softening, we wrote about why we like Miami Beach compared to other areas in the city. Barry Sternlicht, the CEO of Starwood Capital Management, provided similar thoughts recently. 

In an interview with Bloomberg, Sternlicht confidently claims that real estate in Florida, specifically Miami, hasn’t peaked at all. Rather, the region goes through cycles of being overbuilt, but “they’re ever higher cycles; you just have to have stamina to stay with it.”

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While Sternlicht appreciates Florida’s nice weather and tax savings, neither is the main reason he is bullish. He believes it will become a finance and business powerhouse in the coming years, citing pro-business state politicians that reward success. 

A highly quoted example is Citadel which moved its global headquarters to Miami as an intentional play to turn the city into the new financial capital of the United States. 

• Important: Sternlicht does note that Miami is being held back by a lack of schools, which is preventing businesses from flocking to the state as employees can’t find adequate institutions for their kids. 

However, that may not be a problem for long. Last month, it was reported that billionaire Stephen Ross is investing big into South Florida, helping the region develop luxury condos, healthcare facilities, and, most importantly, primary schools and a Vanderbilt graduate campus.

So Where Else?

Another location we have our eye on is the Allston-Brighton area, a set of two interlocking neighborhoods in Boston. Here’s a quick sample of why:

• Proximity to Universities and Colleges: Allston–Brighton is close to several major educational institutions, including Boston College, Boston University, and Harvard. This ensures a steady demand for rental properties from students, faculty, and staff.

• Public Transportation: The neighborhood is well-served by public transportation, including the MBTA Green Line and several bus routes, making it easily accessible to other parts of Boston and surrounding areas. This enhances its appeal to renters who rely on public transit.

• Diverse Population: The neighborhood has a vibrant and diverse community, attracting a mix of young professionals, families, and students. This diversity supports a dynamic local economy and can make the area more resilient to economic downturns.

• Economic Stability: Boston has a robust economy driven by education, healthcare, technology, and finance sectors. Allston–Brighton benefits from its location within this economically stable city, providing a solid foundation for long-term real estate investments.

So how do we wrap this all up? Well, while we might not be KKR, we are looking to buy if the price is right and the financing is favorable. This means asking if there is owner carry available or any assumable debt. 

We’re looking at two properties this weekend in the Allston-Brighton area, so this letter is being published at a great time. As always, hit the button below or simply respond to this email if you’re interested in investing alongside us.

There you have it, that’s all for now. As always, if you’re interested in investing alongside us, fill out the form below.

— Brooks

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