Multifamily cap rates rebounding

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Is Inflation Coming Back?

This week, we got higher CPI, PPI, and retail sales, and the incoming data continues to be strong. Combined with the observed acceleration in average hourly earnings in recent months, the risks are rising that inflation could begin to move higher again. See the chart above for a historical comparison.

Multifamily cap rates rebound, sparking fresh investor interest link

• Cap rates for multifamily properties rose to 5.9% in Q2 2024, compared to 5.5% a year earlier. This increase, along with strong demand, has driven investor interest despite continued high interest rates.

• Sales volume for multifamily properties hit $16 billion in Q2 2024, marking the first rise in two years. Job-rich regions are driving transaction recovery, supported by stable vacancy rates.

• Valuations are lagging behind cap rate adjustments, creating opportunities for buyers. American Landmark predicts further recovery with rental demand and possible Federal Reserve policy easing supporting growth.

Multifamily housing and the 2024 election correlation link

• Effective rents have risen 20% nationally since late 2019, driven by inflation and economic pressures, but rent growth has recently started to moderate. Increased multifamily inventory by 25.2% over the last decade has eased some pressure despite prior double-digit rent growth.

• President-elect Trump’s policies are expected to lower immigration levels, which could reduce rental demand and slow new housing construction due to labor shortages. This may lead to a balance of slower rent growth alongside constrained supply.

• Rent-to-income (RTI) levels are projected to decline as rent growth slows, but local governments will play a critical role in shaping housing markets. Zoning changes and development incentives could mitigate federal policy impacts on supply and affordability.

Industrial vacancy begins to plateau as new construction slows link

• Industrial construction completions dropped to 76 million square feet in Q3 2024, the lowest since early 2021. The pipeline of projects under construction has shrunk 53% from its 2022 peak to 331 million square feet, with further declines expected in the next six months.

• Vacancy rates slightly increased by 19 basis points to 6.6%, with the West region seeing the largest jump (256 basis points) compared to the Midwest (57 basis points). Vacancy is forecast to peak at 6.8% in early 2025 before improving as supply-demand dynamics stabilize.

• Average industrial rents rose 9% year-over-year, with coastal markets seeing declines after years of rapid growth. Colliers predicts steady rent growth closer to historical norms of 2%-7% annually through 2026, alongside improved investment prospects as interest rates stabilize.

Small towns experience a revival—and one is being built with ‘kindness’ in mind link

• Small towns and rural areas are attracting younger populations, with 291,400 people relocating in 2023, the highest since the 1970s. The majority are seeking quieter lifestyles, neighborly connections, and more relaxed environments.

• Silverwood, a planned community in Hesperia, CA, emphasizes kindness with unique features like a "kindness pledge" and neighborhood Village Greens. Its design prioritizes community engagement and walkability, with extensive parks, trails, and amenities like a clubhouse and pickleball courts.

• Initial Silverwood homes, priced from mid-$400,000s to $700,000s, include solar panels and affordable HOA fees of $158/month. The first phase of 646 homes will launch in 2025, aiming to provide attainable housing for young families in a high-cost market.

Phoenix’s highest-supply neighborhoods link

• The Avondale/Goodyear/West Glendale submarket has grown nearly 94% in inventory since 2019, making it Phoenix’s largest submarket with 40,000 units. Rents average $1,551, but high supply has driven occupancy down to 92.1% and increased concessions beyond the market average of 40.9%.

• Central Phoenix, dominated by Class A units, has one of the highest average rents at $1,783 but faces soft occupancy at 92%. Concession usage is elevated, with more units offering deals to attract renters in this urban core.

• Pinal County, the smallest submarket with 8,000 units, saw the steepest rent cuts at 6.5% and the lowest occupancy at 88.7%. Nearly 57% of units offer concessions, reflecting intense competition in this predominantly Class C stock area.

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Exactly why I started this section!

Link to the listing

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Cheers,

Vidit

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