Investors expect a strong 2022 for multifamily investing, but that could include lower profit margins than 2021, according to Lightbox’s 2022 Q1 Investor Sentiment Report.
As higher interest rates put upward pressure on borrowing rates and capitalization rates, earnings will be affected. But David Scherer, co-CEO of Origin Investments, said this does not mark the end of what has been a very strong multifamily market.
“Appreciation and multiples have been so strong for so long that a slight reduction was inevitable,” Scherer said in prepared remarks.
According to the report, rising inflation, rising interest rates and supply chain disruptions that threaten to slow other areas of the market are prompting some investors to adjust their expectations for multi-family housing.
The outlook for inflation and the sector’s mark-to-market capabilities suggest that rents will continue to rise as higher wages provide workers with additional purchasing power.
Additionally, remote and hybrid office trends are supporting the need for larger and better housing, which is shifting multi-family activity from urban developments to suburban markets, particularly in the Southeast, Southwest and other regions with high population growth.
Demand fuels more construction from scratch
Given the limited supply and high demand, construction from scratch is expected to increase in 2022, according to the report. The fundamentals provide a favorable debt and equity climate that translates into significant capital seeking investment.
Many investors who have focused on value-added assets see continued opportunities and the need to adjust approach.
“Historically, you could focus on interior renovations of basic units to generate value, but today many properties have undergone partial renovations after having been exchanged several times over the past 10 to 15 years. years,” Chris Bartlett, head of capital markets at Dallas-based The. Milestone Group, said in prepared remarks. “Now you really have to touch every aspect of the property to drive value.”
Today, elements of a value-added program likely include improving the resident experience, technology updates, comprehensive unit interior upgrades, and online awareness and reputation.