The real estate investment market is in flux, with challenges and opportunities aplenty.
U.S. commercial property prices have tumbled by an average of 16% since their peak in March 2022, leaving investors grappling with uncertainty.
Rising interest rates are often pointed to as the culprit behind this turmoil. Offices have borne the brunt of the impact (given the rise of remote working), witnessing a staggering 31% loss in value since the Federal Reserve initiated interest rate hikes. Meanwhile, warehouse values have declined by just 8%. Multifamily investment activity has taken a substantial hit, with sales volume plummeting by 74% at the end of Q1 2023 compared to the same period in 2022, according to the Wall Street Journal.
But, where there is pain, there is also opportunity.
Multifamily Market Resiliency
Despite the current challenges – rising interest rates, less credit availability, and the possibility of a recession – multifamily investments offer a more resilient prospect compared to their counterparts.
In fact, according to a 2022 survey from CBRE, investors feel positive about the multifamily asset class. Respondents named multifamily as the most preferred property type for the first time in this survey’s seven years. Thirty percent of survey respondents favored it this year, up from 23% in 2022. It led both industrial and logistics at 28%.
Why the reason for optimism?
The underlying fundamentals of the multifamily sector remain intact. New construction hit its highest mark on record, the average monthly net effective rent continues to rise, and the vacancy rate remains stable. All this makes it a viable option for investors seeking to weather the storm.
While higher interest rates can deter potential homebuyers from entering the single-family housing market, they subsequently boost demand for rental properties. Inflation and increased costs can contribute to higher rents for existing multifamily properties. Those with strong financial positions can capitalize on these conditions.
Understanding the Multifamily Investment Risk
One of the challenges in the multifamily market is the bid-ask disconnect. Sellers are holding out for prices that may no longer be realistic, causing uncertainty in pricing. Data on bid-ask spreads for various property types reveals that, as of July, the gap for multifamily apartments stood at 11%, the widest since early 2012.
However, for investors with available funds or the ability to secure financing from the currently tight lending market, this presents an opportune moment to engage in the acquisition of apartment properties.
Have You Done Your Due Diligence?
When it comes to multifamily transactions, undertaking a thorough due diligence process is essential to navigate the complexities and minimize potential multifamily investment risk.
Technology, such as the Leonardo247 Due Diligence platform, offers tools designed to streamline and secure your multifamily investments.
The Leonardo247 platform conducts Unit Inspections, allowing you to easily identify potential issues or maintenance needs. Rent roll analysis ensures that projected rental income aligns with market standards, providing you with an accurate picture of the property’s revenue potential. Lease file audits help identify any legal or financial risks associated with tenant agreements, allowing you to address them proactively. Furthermore, the platform provides robust reporting capabilities to keep you informed and in control throughout the investment process.
The multifamily market presents both challenges and opportunities in the current real estate investment landscape. Rising interest rates, bid-ask discrepancies, and declining sales volume are concerns, but the sector’s fundamentals remain sound. Multifamily investments can thrive amidst these conditions, provided investors exercise due diligence and timing. The Leonardo247 Due Diligence solution emerges as a powerful tool to mitigate risks and enhance decision-making in multifamily investments. In a market characterized by volatility, knowledge, and preparation are your best allies.
Avoid those due diligence disasters. The Leonardo247 Due Diligence platform helps you get the deal done faster and more accurately than ever before. Request a demo today!