Jay Parsons, Principal and Head of Investment Strategy at Madera Residential
Nov 21, 2024
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Join Jay Parsons, Principal and Head of Investment Strategy at Madera Residential, as he shares his deep insights into the multifamily market. He reflects on the 2024 rental landscape, addressing rising interest rates, inflation, and the Fed's policies. Jay discusses the recent St. Paul rent cap's unintended consequences on construction and affordability. He also offers strategies for maintaining occupancy amidst new supply and analyzes the differences between Sunbelt and coastal markets. Dive into his economic outlook and understand the complexities of current housing challenges!
The multifamily rental market is experiencing low sales volumes due to a shortage of sellers despite strong buyer demand and cap rate pressures.
Interest rates are creating challenges for property investors, impacting borrowing costs and leading to cautious transaction volumes in the multifamily sector.
Tenant retention strategies are becoming increasingly important for property managers facing new supply, highlighting a shift in focus from just attracting new residents.
Deep dives
Market Optimism Amid Low Transaction Volumes
Despite a prevailing sense of optimism in the commercial real estate market, apartment sales volumes have plummeted to their lowest levels in a decade. Buyers are eager to transact, yet they face a significant shortage of sellers, primarily due to the absence of distress sales that many anticipated this year. As a result, cap rates are experiencing downward pressure, indicating a seller's market where the balance favors buyers. The pent-up demand for housing remains strong, particularly for multifamily units, suggesting that a shift could occur as more sellers come to market.
Impact of Interest Rates on Market Dynamics
The current landscape of interest rates has created headaches for property developers and investors alike, necessitating careful consideration of borrowing costs. A recent increase in interest rates has brought cap rates in line with borrowing costs, affecting transaction volumes and finance deals. While there is a significant appetite for multifamily housing, the high cost of borrowing could keep transaction volumes low in the near term. Investors may need to navigate these challenges cautiously, which could lead to a wait-and-see approach until the market stabilizes.
Retention Rates and the 'Heads on Beds' Strategy
The multifamily apartment market has seen an uptick in retention rates, surprising many in the industry despite significant new supply. Property managers are now adopting a 'heads on beds' strategy aimed at maintaining occupancy rates, which has become increasingly crucial in a competitive environment. By prioritizing tenant retention and providing a solid customer experience, many operators have managed to keep residents longer, even in the face of new options. This shift is changing how operators view market dynamics, as retaining current tenants has become as essential as attracting new ones.
Substantial New Supply With Rental Growth Variances
The multifamily sector is witnessing unprecedented levels of new supply, yet demand continues to be robust in certain markets. Suburban regions, particularly in Sunbelt states, show a paradox where rental growth remains stable despite oversupply, largely driven by the prior influx of capital and new developments. Conversely, some coastal markets are also utilizing the same decline in vacancies to adjust rental rates effectively. The demand for housing is still very much present; however, it segregates between areas with strong supply and those experiencing affordability challenges.
Regulatory Risks and the Future Direction
One of the chief concerns for investors in the multifamily sector is regulatory risk, which can significantly impact development and ownership strategies. Regulatory measures enacted at local or national levels could reshape the economic landscape and affect property valuations. As sectors respond to shifts in government policy, maintaining a collaborative relationship between builders and local governments will be critical to navigating these risks. Investors should remain acutely aware of the potential for changes in regulations, which could disrupt returns on investments in the sector.
The Need for a Balanced Approach in Investment Strategy
Amidst the current market dynamics, investors must carefully evaluate where to allocate their resources, balancing between lower-cost workforce housing and higher-end developments. The consensus is to favor larger Sunbelt markets, which are expected to have better long-term growth trajectories due to favorable economic conditions and increasing demand. Strategies that focus on middle-market rents, allowing for competitiveness against older constructions, will also be crucial. Investors who target quality developments and remain adaptable will be best positioned for success over the next few years.
Willy was joined by economist, advisor, and speaker Jay Parsons. He is also a Principal and Head of Investment Strategy at Madera Residential, a Texas-based multifamily owner/operator with 11k + units, and additionally serves as an independent consultant and speaker to apartment and SFR groups nationally.
He and Willy covered a range of topics including Jay’s retrospective look at the rental market in 2024, his outlook on rates, tariffs, inflationary pressures, and the Fed, the dramatic amount of new multifamily supply and the overall resiliency of the sector, home sales and their impact on the broader market, implications of the election, sunbelt vs. coastal markets, national rent growth, and much more.
