Multifamily landlords use leasing automation to counter economic hit of higher rates
First Analysis
Venture capital investor and investment banking adviser for fast-growing business-to-business technology companies
June 29, 3023
The phenomenon of low interest rates lasted far longer than most expected but was destined to end eventually. As such, it was an inherently unstable foundation for long-term value in multifamily property portfolios and one over which landlords had virtually no sway.
To offset the erosion of cash flow by higher interest costs, multifamily property landlords are racing to deploy technology that optimizes revenue and minimizes costs, helping ensure their cash flows remain stable or increase.
One of the technologies that can yield substantial operating cost savings, productivity gains and revenue gains is leasing management software. Leasing management systems help landlords maximize the leads they ingest and help sales teams be as efficient as possible.
We profile several companies that provide leasing management systems. Given prospects for sustained high interest rates, we expect these companies and other providers to see increasing demand for their solutions.
Table of contents
Includes discussion of six private companies
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No more low-interest-rate cushion for multifamily landlords
In the immediate wake of the pandemic, multifamily property landlords experienced near-ideal conditions: rising rents and historically low interest rates that supported robust property values. In that environment, the main challenge for multifamily property landlords was acquiring properties at competitive prices to meet rapidly rising rental demand.??
Low interest rates underpinned key strategies for optimizing cash flow from multifamily properties purchased during the pandemic. For example, some real estate investment trusts (REITs) borrowed at fixed rates, locking in predictable debt costs. Other landlords achieved medium-term cash flow predictability with floating rate loans combined with hedges with one- to five-year durations and interest rate caps.
In 2022, the world changed as the Federal Reserve embarked on its aggressive rate-hiking campaign to moderate high inflation. Now, landlords whose hedges are expiring and operators seeking to expand their multifamily portfolios face substantially higher hedging and financing costs, putting their cash flows under pressure.
In March, McKinsey released a report highlighting a 33% year-over-year reduction in the value of multifamily property net operating income in the 2022 fourth quarter. The report pointed out that interest rates were just one factor behind the decline. High inflation was just as meaningful, as supply costs for operations and maintenance, labor costs and other input costs rose substantially.
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