Multifamily Assets: Is Hyper Rental Growth Cooling or are We Just Returning to Historic Norms?

Townhouse Partners ("THP") performs asset management services for clients originating, and surveilling loans secured by multi-family (“MF”) assets in the U.S. As a result, THP sees “real-time” trends in most major markets along with the impact of shifting macro-economic factors. The insight gleaned from this data allows THP to make sound recommendations to clients for financing, asset purchases, hold strategies, and dispositions. THP’s perspective also benefits from multiple platforms of lender clients, which affords a broad overview of CRE financing. 

The pandemic impacted all CRE sectors, yet MF was a “bright spot” that performed well with historic trading levels. The asset class was considered a “safe-haven”, as investors saw strong occupancy, and unabated, if not record rent growth in most markets. This derived from the nationwide paucity of housing, rise in single-family home prices, increase in single-family home rentals, and growth of remote work. Post-pandemic, MF was a favored asset class of CRE investors. The appeal extended to other CRE sectors, as major mall owners including Simon, and Westfield added apartments at some sites to diversify revenue streams, draw traffic, and lower risk. THP’s lender clients with significant MF exposure relied on our assessments, and avoided upheaval occurring in the office, hotel, and retail sectors. 

THP conducted an analysis of 168 mostly Class A/B MF asset transactions for acquisition or refinance in the 12-months through September 2022, encompassing 50,288 units, in five U.S. regions, and 31 states (the “Portfolio”). THP sought to measure performance relative to the overall market. Our analysis revealed general alignment with national trends, including (i) high occupancy, (ii) strong rent growth, (iii) migration to southerly climes, (iv) keen investor interest, (v) increasing lender comfort with the MF sector, (vi) rising suburban demand, and (vii) demographic shifts to secondary cities. Key Portfolio metrics were compiled, and compared with regional, and national averages. THP has extensive resources plus in-depth industry relationships for market data and conditions. In addition, our transaction database permits monitoring of trends to profile future onset of risks for clients.

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What Our Regional Analysis Revealed

The Portfolio average of 61.6% LTV, 1.50x DSCR, and 7.1% Debt Yield reflect greater caution by lenders in the current rising interest rate environment. Despite overall MF sector health, robust rent increases have not kept pace with increasing interest rates in all markets, and the impact of inflationary cost increases. Alternative lenders such as private debt funds are “jumping in” to expand the capital stack, enabling borrowers to make acquisitions of distressed assets, refinance, or extract equity. Although interest rates are forecast to stabilize in 2023 as the “Fed” slows rate hikes, more distressed assets are expected to come to market with the recession looming, forecasted increasing tenant collection issues, and anticipated inflationary expenses increases.  THP is adept at performing scenario analyses to gauge risk and advise clients on the best approach for favorable outcomes. 

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The Portfolio average cap rate of 4.2% was below the 5.2% U.S. average per CoStar, which both reflect ongoing compression since at least 2017. Cap rate premiums of 25 bps were evident for Class B versus Class A assets, consistent with market data. Portfolio loans were mostly fixed-rate with most borrowers avoiding high interest rate cap costs on “floaters”. Potential negative leverage is foreseen being mitigated by rent growth, a competitive advantage over asset classes with longer-term, fixed rate leases. Difficulty valuing assets in the current environment was aided by strong historical MF rent growth, and high occupancy.

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"Rents soared in the pandemic but rent growth has paused from economic uncertainty. The 2023 year will likely be one of transition, with a resumption of growth as we roll into 2024."

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THP also surveyed a Portfolio “sub-set” of 44 MF asset transactions in five major southeast cities (Nashville, Atlanta, Charlotte, Tampa, Miami). The average 1.60x DSCR, 7.4% Debt Yield, and 4.1% cap rate outperformed the overall Portfolio, an indication of strong demand in these markets. YoY rent growth ranged from 4.8% to 12.0%, with vacancies of 4.0% to 7.6%. Miami led the way, and along with Tampa is among the top 10 migration destinations, per Redfin. According to Colliers, Charlotte and Tampa are in the top ten cities for job growth in the financial services, life sciences, and technology/media/telecom (TTM) sectors, over the prior five years. All five markets also recorded corresponding YoY declines in single-family home sales. An aging population, high cost of living in gateway cities/major metros, urban flight, growing tech employers attracting youth, pandemic impacts, and better climate, has spurred individual and corporate migration to the “Sun Belt”. Approximately 140,000 have moved from the New York metro area to Florida since 2018, per Placerai. Florida’s population for the year ended July 1, 2022, increased 444,000, and was the top gainer followed by Texas (350,000), North Carolina (126,000) , and South Carolina (95,000), per the U.S. Census Bureau.

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What Does the Future Hold? 

At present, MF rents, rent growth, and occupancy have begun to moderate. Per Yardi Matrix, rents nationwide declined $9 nationally in November 2022, the largest one month decline in a decade. New MF construction is forecast to slow, as higher construction costs, and residual supply-chain issues make feasibility rent less attainable. Lennar announced it would postpone spin-off of its “Quarterra” multi-family business due to weaker market conditions. Near-term challenges for MF include end of the low interest rate era, reduced capital sources, pending recession, suppressed demand, more layoffs, lower wages, reduced rent growth, climate change (i.e., recent Hurricane Ian), rent control initiatives, and new supply. Per the U.S. Census Bureau, as of October 2022, there were 900,000+ MF units, and almost 800,000 single-family homes under construction nationwide.

Now more than ever is the time to contact THP to leverage our in-depth market insight, and data-driven capabilities for due diligence, advisory, and valuation support services for owners, investors, developers and financial institutions.