Multifamily Investors Target Newer Assets for Stable Cash Flows

The US multifamily market has witnessed a surge in transactions involving newer apartment properties built after 2017. This trend, driven by a "flight to quality" among investors, has been prominent in 2023 and 2024. As investors shift towards core and core plus strategies, newer assets, often featuring modern amenities and energy-efficient designs, have become highly sought-after. These properties are perceived to offer stable and predictable cash flows, attracting both tenants and investors, and thereby contributing to higher transaction volumes.

Several factors have motivated sellers to dispose of newer assets, including liquidity needs, the end of fund life cycles, the pursuit of broader business goals, and loan maturities. Merchant builders, in particular, have been selling properties when lease-up rates are slow or construction costs are too high. Despite a decline in overall transaction volume, multifamily properties continue to be attractive to investors due to their resilience and steady income streams, making them a desirable asset class in a volatile economic environment.

Both private and institutional investors have been actively acquiring multifamily properties this year. Fund shops, syndicators, separate account managers, private investors, foreign pension funds, and public REITs have all participated in the market. Public REITs, in particular, are partnering with foreign capital and seeding platforms with existing assets in exchange for capital commitments to pursue new opportunities. These entities have substantial capital and access to competitive financing options, enabling them to undertake large-scale deals. They believe that they can acquire high-quality assets at a discount to replacement costs in the current less competitive market.

The top three buyers for the quarter were FPA Multifamily, Kairoi Residential, and Blackstone, demonstrating their strong presence in the market. CIM Group, Heitman, and AvalonBay were among the top sellers during the same period. Over the past two years, 80% of all US apartment transactions exceeding $50 million have been concentrated in 25 markets, with Austin, Dallas, Atlanta, Phoenix, and Miami emerging as leading destinations. These regions attract investors due to strong population growth, robust job creation, favorable economic conditions, and high demand for rental housing from young professionals and families seeking lower living costs.

Markets that avoided overbuilding in the previous cycle continue to appeal to investors seeking stability, liquidity, and long-term growth potential. Boston, Chicago, Washington, D.C., and New York are examples of such markets. While there may be pockets of existing oversupply, they are likely to be absorbed over time. The New York City metro market accounted for 9.7% of Q2 transaction volume, followed by Phoenix, Dallas, Los Angeles, and Washington, D.C.

The trend of multifamily investors targeting newer assets for stable cash flows is expected to continue in the foreseeable future. As the economy evolves and investor preferences shift, the specific dynamics of the market may change. However, the underlying appeal of newer multifamily properties as a stable and attractive investment option is likely to persist.

Conclusion

The US multifamily market has recently witnessed a significant shift towards newer assets. Investors seeking stable cash flows and long-term growth potential have been drawn to these properties, driving up transaction volumes. While the overall market has experienced some fluctuations, the underlying fundamentals of the multifamily sector remain strong. As the economy continues to evolve, it will be interesting to observe how investor preferences and market dynamics shape the future of multifamily investing.

Courtesy: Kristen Smithberg

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