Where We Are in the Multifamily Market Cycle?

The Growing Popularity of Multifamily Investments

After the financial crisis in 2008, a lot of investors saw multifamily properties as a safe bet during uncertain times. Thanks to really low interest rates, it was easier and more appealing to borrow money, which led to some strong profits. The JOBS Act of 2012 also made it easier for more people to get into investing by allowing crowdfunding, which brought even more money into the sector.

People were drawn to multifamily investments not just because of the low borrowing costs but also because they believed these investments would hold up well, even if the economy went south. The thinking was simple: people always need a place to live, no matter what's happening in the economy. This belief, along with a surge of eager investors, created a very active and optimistic market.

Source: Moody's Analytics CRE

The Risks of Getting Too Excited in the Multifamily Market

As the market got hotter, investors started chasing properties they could improve or manage better to increase cash flow. This rush brought a lot of new players eager to get a piece of the action. But sometimes, their excitement made them overlook the balance between risk and reward.

Then COVID-19 hit, shaking things up by increasing the demand for bigger living spaces and leading to some unprecedented economic policies. With rents going up and interest rates staying low, some investors got a bit too bold, banking on the idea that rents would keep rising and financing would always be cheap. This kind of thinking ignored some basic market truths and set the stage for potential trouble.

Interest Rates Jump and a Return to the Basics

When the Federal Reserve started raising interest rates in 2022, it signaled the end of easy money and made investors rethink their strategies. This wake-up call highlighted the need to stick to smart investing basics. With interest rates climbing quickly, investors are feeling the pinch on their returns, especially in the short term. Now, more than ever, it's crucial to be realistic about what you can earn, focus on the real value of your investments, and not get carried away with overly optimistic predictions. Being conservative remains paramount.

Understanding Real Estate Cycles

To get why all this is happening, it's helpful to know about real estate cycles, which usually go through four phases: recovery, expansion, hyper supply, and recession. During recovery, the market starts to pick up after a downturn. In expansion, things are booming, and there's a lot of building and buying. Hyper supply happens when there's too much real estate available, leading to a drop in prices. Finally, recession is when the market slows down, prices fall, and it's tougher to make money.

Source: Mueller, Real Estate Finance, 2016

Understanding these cycles is important because seasoned investors know how to keep their cool and work through the pros and cons of each cycle. For now, while prices are down and experiencing a correction from than the grossly inflated prices we experienced in 2021 and early 2022, there’s an important signal to catch. If you’ve ever heard the saying “you make money when you buy”, it’s this exact time in the cycle when this statement rings true. It’s time to buy.

Lessons and Moving Forward

The recent ups and downs in the multifamily market are a clear example of the real estate industry's cycles. They remind us that ignoring solid investment principles can lead to trouble. As the market keeps changing, the lesson is clear: successful investing is about being smart, understanding the market's natural rhythms, and being ready for change. By sticking to these basics, investors can navigate through uncertain times and keep the multifamily sector strong and profitable in the long run.

---