Waiting for the distress wave in multifamily has been a thing since the fall of 2022. Many pros have been telling GlobeSt.com that it had to come. Interest rates that kept going up, too many deals at near zero interest and high leverage, banks shying off from lending, jumps in longer-term Treasury yields, and owners and investors worried about putting more good money after bad have been pushing outcomes.
And yet, even with falling transactions, dropping valuations, rising cap rates, and increasing loan delinquencies, there hasn’t been the collapse — or at least big waves of distress — that were supposed to happen. The question has continued to be when. If Origin Investments is correct, that could be the second half of 2024.
“The volume of variable-rate bank loans—made when SOFR was 0% and the 10-year Treasury note yield was below 2%—coming due in 2024 will create a generational opportunity in senior debt and preferred equity investments,” said Origin Investments Co-CEO David Scherer said in preprepared remarks. “Despite uncertainties, it remains a mistake to stay out of the multifamily investment market in 2024.”
Some of the factors leading into the recommendation are modeled presumptions of what CRE conditions will be. The first is that interest rates will remain high compared to the what they were immediately pre-pandemic “because the 10-year Treasury yield, which heavily influences interest rate movement, will stay between 3.50% and 4.50%,” they write. “There is no expectation for a substantial drop in 2024 until inflation is slowed further.” Revised GDP growth of 5.2% in 2023 Q3, $33.2 trillion in national debt, and the need for U.S. bond refinancing will keep interest rates elevated.
Origin Investments also suggested that a recession is likely. “Origin predicts that will change and spur a mild recession beginning in the latter half of 2024 and deepening in 2025, though its depth and breadth will depend on actions taken by the Federal Reserve and the Legislature,” they wrote. This is a controversial stance at this point. There has been increasing data suggesting a soft landing. A recession would likely need a sharp increase in unemployment over the current 3.7% rate, and that hasn’t been in the cards.
However, other fundamentals are also in play. Multifamily valuations have fallen and seem likely to continue to. There is a big wave of new multifamily construction coming. Even if that slows — Origin suggests it will because of CRE lending hitting historically low levels. Plus, operational expenses continue on the rise while rent growth seems reverting to historical norms.
To top it all, “Falling valuations and an avalanche of variable-rate bridge loans coming due has inspired the use of the term ‘cash-in refi’ and will create generational opportunities to recapitalize or buy quality value-add multifamily assets in growing markets at or below replacement cost pricing,” they write. “These opportunities will be increasingly prevalent by Q3 2024.”