Thought Leadership
Higher for Longer Means Slower for Longer — But, That’s OK
Sometimes the multifamily sector reminds me of that Simon and Garfunkel song “Feelin’ Groovy” – not because I’m so happy about the way things are going, but because of the opening line: “Slow down, you move too fast.”
Not so long ago, rents were climbing by double digits, which was clearly too fast. A slowdown was inevitable. But we hold our property for decades and that means we anticipate at least one recession or maybe two during our ownership period.
The latest Quarterly Survey of Apartment Market Conditions from the National Multifamily Housing Council shows that both debt and equity financing have pulled back for multiple quarters because of higher interest rates and slower rent growth. Transaction volume fell again too.
The Fed seems poised to keep interest rates higher for longer to tackle inflation, so to me, what’s happening in the multifamily market is a natural reaction to market conditions. I don’t see this as an overall weakness in the market because demand drivers are still in place for rental communities, such as the high cost of homeownership, a good job market and more household formations. We’ve got downsizing baby boomers, young Gen Zers renting their first place and millennials leaving their parents’ basements and roommates, along with the usual migration for jobs or a new lifestyle.
But naturally, owners are holding onto their property for longer. The capital required for buyers to buy them is less available. No one wants to sell at what seems like below peak prices.
Everyone wants to wait and see if interest rates fall or the cash flow rises on their business. People who don’t have to sell won’t when values fall. People that do need to sell still haven’t used up all of their rope before they’ve hung themselves.
At some point, if rates stay high enough for long enough, those sellers will need to do something. They’ll either sell their assets or they’ll need to refinance them, and they’ll need to inject capital to facilitate the refinance.
The market can’t stay this way for an extended period of time. Eventually, there will need to be market clearing, which is something people are delaying right now in the hope that their cash flow rises or interest rates drop back.
That’s where we can come in. We’ve locked in long-term low interest rate debt, so we’re not at risk. In fact, we can help other owners solve their problems by facilitating a 1031 Exchange to mitigate tax issues, provide management services to improve NOI, do a joint venture to capitalize on land opportunity or discuss our private non-traded REIT. Market slowdowns can be managed in a variety of ways – and we’ve got six decades of experience to share.