Strong Outlook, Abundant Capital in Multifamily Sector

Strong market fundamentals, an abundance of capital and an influx of investors continue to propel the multifamily market, said Real Capital Markets, Carlsbad, Calif.

Most investors Real Capital Markets surveyed said they are in a “buying mode,” and many reported a shortage of quality assets available, especially in the value-add category. Underlying rental demand fundamentals continue to draw a wide range of investors into the multifamily sector despite upward movement in interest rates, the firm said.

“Overall, the commercial real estate market and particularly the multifamily sector remains strong, with significant capital both domestic and foreign looking to be placed,” said Real Capital Markets COO Tina Lichens. “The challenge for many investors is finding quality assets at reasonable prices.”

RCM found capital “chasing” deals. “There is at least $250 billion in capital already committed to commercial real estate, with much of it likely focused on the multifamily sector,” the report said. “This capital is coming from a range of investors including institutions, private equity, real estate investment trusts and private and public funds.”

The most popular product types multifamily investors currently seek include garden-style and suburban apartments, followed by urban apartments, RCM said.

Nearly 70 percent of survey participants called interest rates a looming concern, mostly because the market has already absorbed 12 to 18 months of increases and spreads are very thin. “The consensus is that further rate hikes will be difficult for lenders to absorb,” the report said. “This increased cost may cause investors to modify their strategies.”

With national and individual market vacancy rates fluctuating as significant new supply is brought online, more than half the survey participants said vacancy rate increases are likely, but predicted the level of increase will be “only marginal.” Nearly 65 percent said they believe rents will increase at least marginally as well. “Given these factors, while almost one-third of investors see a slight slowing of the market, approximately two-thirds of investors believe the market will maintain at current levels and remain strong,” RCM said.