The Fed has done it again! With another interest rate hike of 75 basis points in September, the cost of debt capital has reached new heights. As a result, the sales volume for industrial and retail real estate continues to taper while the price per square foot holds relatively steady, and office space continues to struggle post-pandemic. Meanwhile, sales volume for multifamily assets has been decreasing while the sale price per square foot is skyrocketing, as depicted in figure 1.
This massive discrepancy in volume, demand, and price in the multifamily product type signals a great opportunity for the wise investor — hold it if you own; acquire while rental demand continues to increase. The lack of sales of multifamily properties is easily explained. Landlords are holding on to residential rental properties, only parting with them for significant sale prices and all-time low cap rates. Why? Because today it’s safe — smart even — to be a landlord of an apartment building.
With the massive increase in the cost of single-family homes, due to ever-increasing interest rates, demand for rent is through the roof, and as a result, so are rental rates. Nevertheless, renting is still cheaper than paying 7% on a mortgage. In other words, the run on apartment buildings today could lead to a soft housing market in the near future.
The current market outlook may be grim, but the savvy investor can find opportunity in one of two ways. With a high demand for multifamily assets, investors should own and operate multifamily units or invest with someone who does. This will create steady cash flow investment that will hold its value against inflation and curb the effects of inflation on their dollar significantly. This is the first of the two opportunities that exist. The second requires a little more patience. Wait! Wait until the housing market goes a little soft and acquire residential when the opportunity presents itself. So, what does this mean for commercial real estate? Well, sales volume is way down for because investors who own CRE cannot find comparably quality investments to replace these assets with. Investing in multifamily assets in one way, shape or form may be the best way to weather the storms the housing market has in store.