The return of the gateway market in multifamily
Investors - SEPTEMBER 14, 2023

The return of the gateway market in multifamily

by Lewis Dayton

The multifamily market in gateway cities is returning with significant opportunities for investors, said Adam Levin, executive managing director at Levin Johnston, and Robert Johnston, senior managing director at Levin Johnston, in a recent exclusive interview with Institutional Real Estate, Inc.

High interest rates and record housing prices, combined with new housing developments being further out from urban centers, has led to “an increasing number of younger professionals who see rentals as their preferred housing,” the two said.

Levin and Johnston commented on the recent changes in the multifamily-financing landscape and emphasized the growth in private credit access for deals. Bank lending has decreased in the wake of “the SVB debacle, so funds that have large stores of cash now want to deploy it and will be looking more and more to real estate for deals.” They expect that property owners who want to sell will eventually become more comfortable with the lower valuations on their properties, and the “coming together of funding access and lower prices will drive deal flow.”

Yet there are certain trends in multifamily that are driving up costs for both investors and renters, particularly the increased focus on amenities. They are important and “are all part of keeping tenants happy and renewing,” say Levin and Johnston, yet the luxury focus has led to longer lease-up periods than some investors were hoping for.

High interest rates and corresponding high treasury yields and money market account returns are causing investors to ask for higher returns from their real estate investments. Levin and Johnston said, “There are deals getting done that have good economics, it is just a more difficult market thanks to the Fed’s policy.” However, they expect that the market will equilibrate “with the higher rates – whether that’s over 5 percent or something less, we don’t know – but they aren’t going back to zero and investors will eventually get used to the idea and deal volume in multifamily will pick up again.”

The multifamily markets poised for the most growth going into 2024 are the San Francisco Bay Area (particularly the Silicon Valley region), New York, Miami, Dallas and Sun Belt cities that saw high pandemic migration and employers that followed (and are following) that influx of residents.

San Francisco’s Bay Area has “nearly fully recovered from the effects of the COVID pandemic,” said Levin and Johnston. Job growth in the region has been consistent, unemployment is below 3 percent and “Bay Area cities are still meccas for high tech, life sciences and industrial companies that come with highly paid employees and large numbers of educated, younger professionals.”

Across many gateway markets, the strong job market, high housing costs and the dip in bank lending have all made this moment an opportune time for institutional investors to consider adding multifamily projects to their portfolio. Levin and Johnston closed the interview by saying, “The economy has shown resilience in the face of some strong headwinds and these major cities are poised to pick up growth – as long as rising inflation doesn’t return and more monetary tightening from the Fed comes with it.”

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