Multifamily Market Update - Winter 2024

One year ago, the multifamily market was in a moment of heightened uncertainty. Interest rates were climbing at a dizzying pace, insurance premiums were skyrocketing, and investors watched nervously as property valuations were dropping.

Fast forward to today; multifamily appears to be on the upswing. As an active real estate investor who lives and breathes these market dynamics, here are 3 major takeaways I’d like to share about the current multifamily market.

Banks are becoming more interested in lending again.

The lending landscape for multifamily real estate continues to evolve, with interest rates remaining elevated but banks becoming more competitive. During last winter's loan search, I encountered a challenging market with limited lending options. After an extensive search, I ultimately secured a 5-year loan at 7%, when the 5-Year Treasury was at 4% – representing a 300 basis point spread.

Recently, the market dynamics have shifted. I was able to obtain a new term sheet at 6.7% for a 5-year loan, with the 5-Year Treasury still around 4%. This tighter 270 basis point spread reflects increased bank aggression and willingness to lend. Notably, more banks were now providing term sheets compared to the previous winter.

Insurance costs are stabilizing in markets without major storms or wildfires.

As natural disasters wreak ever more havoc across the country, so are they upending the insurance industry, which is passing higher costs to policyholders. Rates have increased by 50%+ in States like Florida or California that are subject to weather events or wildfires.

In Minnesota, insurance rates are experiencing moderate but uneven increases. While some carriers have doubled their premiums, others continue to maintain relatively stable pricing. I’ve had a few carriers offer inflated renewal prices in the last 18 months, and each time, I’ve managed to shop around and obtain a more competitively priced policy.

There has been a significant shift in how wind and hail insurance claims are handled. Where policyholders previously paid a standard deductible, they now are responsible for paying 5%+ of the repair cost. This added cost won’t be noticed today but will certainly be felt at some point in the coming years.

Multifamily prices have risen over the past year.

Inflation, once a significant concern for investors, has eased, improving overall market sentiment—a trend supported by the Federal Reserve's reductions in the federal funds rate. This has prompted some buyers to re-enter the market, creating more competition.

Also boosting values is the previously mentioned fact that more lenders are willing to write loans versus a year ago, and those lenders have also become slightly more competitive with their spreads.

While prices remain below the peaks of 2021, recent sales comparisons indicate measurable progress. For instance, the Golden Valley Greenway Apartments in Crystal, MN, a fully renovated 67-unit building, sold for $7 million ($104,000 per unit) a year ago. Recently, the nearby Valley Place Apartments, a renovated property of comparable vintage, sold for $15.9 million ($121,000 per unit). This example represents a 16% higher price-per-unit in the same sub-market.

Final Thoughts

While challenges like elevated interest rates and rising insurance premiums persist, there are clear signs of progress. Lending has become more competitive, with banks showing increased willingness to fund deals, and property values are steadily climbing, though still below 2021 peaks.

As an active buyer in this evolving market, I believe this is a unique opportunity to acquire multifamily assets at discounted values. Finding solid deals remains challenging, however, and success is reserved for the investors who can navigate the shifting landscape.

-Ben Michel

Ben Michel is the founder of Ridgeview Property Group, an investment firm specializing in multifamily real estate. Register Here to be notified of available investment opportunities.