The Founder of Apartment Loan Store, a commercial mortgage firm, and the author of “The Encyclopedia of Commercial Real Estate Advice,” recently shared his insights on the current state of the multifamily real estate market with a client. The client wanted to purchase a 22-unit building in Portland, Oregon, despite the low cap rate and low return on investment after loan payments. The founder questioned the client’s decision to overpay for the property and then invest time and money to make improvements for a potential increase in value.
The founder pointed out that the current economic cycle is different from previous years, with increasing interest rates, flat rents, new units coming online, and rising vacancies and concessions. He emphasized that purchasing based on expected rent increases in the future may not be a wise decision in the current market conditions. The client eventually made a lower offer, which was rejected. The founder believes that valuing apartment buildings based on net operating income and market cap rates rather than price appreciation is a more sensible approach.
In his view, multifamily properties are overpriced due to the reliance on price appreciation rather than net operating income for value growth over the past two decades. He highlighted four key considerations for investors looking to enter the multifamily real estate market in 2024. Firstly, high property prices today are a result of low interest rates in the past. Secondly, sales volume is down compared to previous years, leading to sustained high prices. Thirdly, cap rates are now lower than interest rates, impacting investors’ cash-on-cash returns. Lastly, current data does not support the high prices of multifamily properties, with rental growth expected to be minimal in 2024.
The multifamily market has seen a shift away from the favorable conditions of the past, and investors should exercise caution when making purchasing decisions based on optimistic assumptions about future rent increases. With rent growth projected to be low and vacancy rates expected to rise, investing in multifamily properties at today’s high prices may not yield the desired returns. The founder recommends approaching property purchases in 2024 with a focus on the current market data and realistic expectations for rental growth and property value appreciation. Ultimately, he advises seeking advice from licensed professionals for personalized financial and investment recommendations.
