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Multifamily concessions were rare in the post-pandemic years of 2021 to 2022. Not only did multifamily investors make more money eliminating concessions, but they were also blessed with double-digit, year-over-year rent increases. Things were very good for those multifamily investors, even though construction and borrowing costs were up by similar margins.
The pandemic and subsequent resettling of America caused unprecedented life changes, and relocating homes to work remotely was acceptable to employers. Remote work in the pandemic era was now standard, and where you lived didn't matter if you could do the job. The resettling of workers ranged from moving across the street to across the country now that a physical presence at an office was no longer required. Renting a home is a much smaller commitment than buying. With the unprecedented increase in for-sale home prices, multifamily owners had a lot of leverage to increase rental rates and eliminate concessions through this shift in working behavior. |
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With this new leverage, developers could increase their proforma rents, and many predicted aggressive rent increases in the future. Deals looked better, equity and debt were easier. New development was added into the pipeline, especially in the Sunbelt markets, where getting projects out of the ground is traditionally easier and quicker. But with all things real estate, overbuilding causes corrections, and we are just beginning to see the results of this correction.
Markets like Albuquerque saw modest new multifamily development from 2000 through 2020 and had incredible rent growth between 2020 and 2022 because they were undersupplied. But Albuquerque will enter 2024 with more new supply than ever in its history—except for the 80s multifamily boom. (For those familiar with Albuquerque, think Montgomery Blvd. between Carlisle Blvd. and Wyoming Blvd). Staying power will save the day for investors. The well-capitalized developers who did not use financial engineering (pref equity or mezzanine debt) and who have longer-term bank loans and reasonable loan-to-cost ratios will have to add two to three years to their proformas. The equity multiplier might be the same, but the IRR will take a hit. |
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- Drew Dolan DXD Capital Principal and Fund Manager |