According to the 2023 Investor Intentions Survey by CBRE, these factors and more have created expectations that more than half of investors will decrease purchasing activity in 2023 compared with 2022 levels. Amid lower pricing dynamics, 60% of respondents say they will either sell less than last year or not sell at all.
Despite the gloomy predictions, there's reason to be optimistic in the long term. While we may not see the Fed reverse their current rate hike strategy, it seems increasingly likely that a pause is in the cards as we've begun to see CPI & other core metrics begin their downturn (sticky service/wage related inflation notwithstanding for now).
We'll continue top see that impact in the multifamily market. The ongoing rate hikes have caused debt to become more expensive and less available, precipitating a rise in cap rates across asset classes.
According to CBRE: "Since Q1 ('22), the average multifamily cap rate has increased by 113 bps. Additional cap rate expansion is likely as the Fed continues to raise rates."
The increase in cap rates has been outpaced by borrowing costs, creating a situation that's unsustainable in its current state.
Many property owners will need to refinance their debt or liquidate their assets, and that could create opportunities where well capitalized investors can pick up performing assets below replacement cost and at reduced prices.
As CBRE notes, "more investors are adopting opportunistic and distressed strategies to take advantage of market conditions."
One thing that hasn't changed for us at Blue Lake Capital is a business model focusing on strong markets.
As we've noted before, we look for demographics where there is some recession resistance, a strong job market that is likely to bounce back more quickly than others, and areas where there's been general stability vs looking for home run growth.
Many of these markets tend to be supported by a strong college presence, healthcare, and even tech, despite the recent job cuts in that sector
"In 4th quarter 2022, college town markets saw positive quarter-over-quarter rent growth while national rents were cut to the tune roughly 1.0%. Similarly, quarterly occupancy change in college town markets has been about 30 basis points more stable than the U.S. overall in the past four quarters." - Real Page
The college town impact during downturns is one that you can't underestimate:
- Higher education tends to hold up better than other sectors even when the broader market is experience job joss.
- Many colleges and universities go hand in hand with regional healthcare centers, supporting higher paying jobs.
- The presence of students provides a fairly steady demand for housing but also creates a multiplier effect of spending that can benefit local economies outside of the higher ed ecosystem.
Not coincidentally, you'll see quite a number of the markets we're targeting have a strong college presence as well.
Top Multifamily Real Estate Markets in 2023
In terms of specific markets, while we keep our deal flow active nationally, there are some regions and specific markets where we're paying particular attention and we feel best fit our demographic models, specifically:
Arizona (Phoenix), the Carolinas (Charlotte, Raleigh-Durham, Wilmington, Myrtle Beach/Conway), Florida (Jacksonville, Orlando, South Florida, Tampa/St. Pete), Georgia (Atlanta), Texas (Austin, Dallas/Ft Worth) and Utah (Salt Lake City).
Key Takeaways
- While we can't expect to see the type of growth we've experienced the past several years, many markets look better suited to survive a recession and bounce back quickly once conditions ease again.
- More investors will implement opportunistic and debt strategies than last year because of attractive returns amid higher interest rates and tighter financial market conditions.
- Economic conditions will create a window of opportunity for well-capitalized buyers to purchase assets at reduced prices.
Ultimately, we feel that multifamily continues to be a great space to invest in, and that we'll be moving back into very positive territory in 2024 and beyond.
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About Ellie Perlman
At Blue Lake Capital, Ellie and her team work exclusively with family offices and accredited investors, offering carefully curated investment opportunities that emphasize long-term wealth creation, stability, and risk-adjusted returns. A defining aspect of Blue Lake’s investment strategy is its integration of advanced AI-driven analytics and data science into the entire lifecycle of acquisitions and asset management. By leveraging cutting-edge technology, the firm executes data-driven forecasting on market trends, asset performance, and tenant behavior, ensuring strategic decision-making and optimized returns.
In addition to leading Blue Lake Capital, Ellie is the original founder and host of "REady2Scale - Real Estate Investing" podcast, which provides insights into multifamily real estate, alternative investments, and finance.
Ellie began her career as a commercial real estate attorney, structuring and negotiating complex transactions for one of Israel’s leading development firms. She later transitioned into property management, overseeing over $100M in assets for Israel’s largest energy company.
Ellie holds a Master’s in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can learn more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.
