The current shift in many markets toward steady and even declining rents has an impact on multifamily investments and individuals who own apartment buildings.
In addition, landlords are in a unique position compared to other run-ups because inflation is currently rising faster than rents, which could provide difficulties for buyers when working with their lenders.
According to Jamie Berenger, chief credit officer at A10 Capital, the multi-family industry has seen a disproportionate amount of capital invested recently when compared to other asset classes. This sector is seen as a safe haven for real estate investment.
Buyers had to anticipate large, ongoing rental rate growth in order to “pencil” agreements, according to the increase in capital-chasing transactions, she claimed. Should they materialize, a fall in rent growth predictions could lead to extended or, in more extreme cases, missed business plans.
A lack of rent growth will put pressure on stabilized (takeout) indicators, especially on transitional assets secured with bridge loans, which will create a divergence between lenders and borrowers in the future.
Rents are rising faster than expenses.
We are going to continue to see a cooling in the multifamily market, especially in the places that were overheated in 2022 (Florida, Tennessee, Nevada, Arizona, etc.).
Rents and sales will continue to decline as the economy continues to be affected by inflation and interest rates, which Bechtel predicted would likely continue until the third or fourth quarter before the Fed starts to taper.
I believe that a recession is already underway, particularly when you consider benchmarks like a flat or inverted yield curve, long-term U.S. Treasury bonds with a yield over 3%, and negative growth over the last two quarters.
Operating expenses will certainly increase due to inflation, which could have an effect on property values if the landlord is unable to pass these costs on to tenants in the form of higher rent.
In some circumstances, the increase in expenses is surpassing the rise in rent for the first time in many years, leading to a decline in NOI growth. You might observe rising capitalization rates together with declining sales, which could further decrease values.
Rent Growth Forecast is Being Reduced
According to a story this week by GlobeSt.com, at least two apartment rent analysis organizations recently lowered their projections for 2023.
RealPage has revised its effective asking rent growth prediction for 2023 downward to 3%, with rent movement differing considerably by asset type and by submarket.
Yardi Matrix anticipates all of that growth to occur in the first two to three quarters of the year and has reduced its apartment rent projection for 2023 downward to 3.1% from 3.5%.
