Multifamily Fundamentals Is the New Normal

Overview

At Bonaventure we focus on long-term returns, not short-term churn. But that doesn’t mean we ignore trends in our industry and in the economy. In fact, we track the news voraciously so we can take our own path – sometimes in a different direction than everyone else.

Even though apartment performance is down from the peak of 2021 and early 2022, fundamentals remain strong. Capital markets are slowly readjusting to a new normal. People are accepting that the days before the Fed stated raising rates are gone for good.

We recognized that 2020 and 2021 were an aberration and we expected the future to look like the long-term past, so we were quick to adapt.

Here’s what we expected: Rent NOI growth would decelerate from its peak. The development pipeline would halt once the units currently underway are delivered.

Here’s what we did: We adjusted course immediately. We focused on reducing expenses to drive NOI instead of focusing solely on revenue growth. We got control of sites with long- term rights so we’re ready when development economics make sense again.

But in the interest of putting some daylight on things we missed, here’s something that surprised us: the resilience of the single-family home market. We didn’t think about the fact that everybody refinanced their house into 2% and 3% mortgage rates. Now that rates are 6% and 7%, people just decided not to sell.

So, while we looked at the demand side for houses, we didn’t look at the supply side, which was affected just as much by higher rates. Of course, there are fewer people buying houses when rates are high, but there are even fewer selling them. Home prices remain elevated and new home construction is robust since they’re not competing with very many resale houses.

What does this have to do with apartments? A couple of things – and the good news is that they’re both positive. First, the price of housing remains high and interest rates are higher, which means homes are less affordable. We provide an alternative to homeownership, and in many markets it’s much more cost effective to rent today. Even if you want to buy, there’s a crimped amount of supply.

The other thing that’s positive for apartment fundamentals is the strength of new construction. We mostly build mid-rise buildings, which are common in the markets we serve. Just like single-family home builders, we use wood frame construction. Normally, when interest rates are high, home construction falls off and that relieves the pressure on apartment construction costs. This hasn’t happened, and that’s not bad. It just means the supply spigot will be off for longer, which is encouraging for apartment economic fundamentals and will keep rents elevated.