This article is presented by Connect Invest.
The multifamily real estate market has, without a doubt, been through some tough times over the past few years. Rising interest rates and a falling demand following a multifamily building boom compounded to make multifamily less of a safe investment than it once was.
However, according to the most recent CBRE Multifamily Underwriting Survey, there are signs that confidence is returning to this segment of the real estate market.
What is behind the optimistic sentiment uptick, and should this confidence translate into multifamily investment action if you’ve erred on the side of caution so far?
Rate Cuts + Expected Surge in Renters = Improved Buyer Sentiment
The latest federal interest rate cuts in September and October are a major factor in the survey’s optimistic prognosis. In Q3, 64% of core-asset buyers expressed a positive outlook, as opposed to just 57% in Q2. Value-add buyers had the highest levels of confidence at 70%, up from 62% in Q2.
Lower interest rates make any real estate investment more viable, and they are particularly helpful to investors who cannot rely on sharp rental growth, as is the case in the current climate. Investors are feeling confident despite the fact that underwriting assumptions of annual asking rent growth for value-add properties actually decreased in Q3, to 3.2%.
Rent growth deceleration is by now a stable trend. Internal rate of return (IRR) targets have been going down for value-add assets for seven consecutive quarters. For core assets, underwriting rental growth predictions for the next three years are at a modest 2.8%.
Overall, the actual market figures are pretty stable, with mostly unremarkable variations in both going-in…