Savvy investors stockpiling their funds to buy multifamily housing at bargain prices  may find themselves stuck on their stockpiles and second-guessing their judgment.

“The much-anticipated deluge of properties driven to market by maturing debt, higher refinance rates and tighter debt service restrictions has not materialized,” reported Marcus & Millichap in its 2024 Multifamily National Investment Forecast. “This has frustrated the wave of capital set aside to acquire distressed properties and weighed on trading activities.”

Instead, after two years of record trading, multifamily investment appears to have reverted to historical norms. Transactions in 2023 were comparable to those of 2014, well below the levels of 2021 and 2022. Instead of selling, many owners have had a change of heart. “The current climate has convinced many to extend their hold period,” the report commented.

However, there is still hope for buyers. “In the coming year, as investors calibrate to the more stable, but higher interest rate climate, sales velocity should steadily gain momentum,” the report predicted. In a more stable interest rate environment, both institutional and private capital could come out of the shadows, “facilitating price discovery and helping to narrow the expectation gap” between buyers and sellers.

“Value creation has begun to surface as the hallmark strategy for investors contemplating negative leverage transactions,” the report noted. It pointed out that even though cap rates have increased by as much as 200 basis points on average, they may still be below the cost of debt capital. This could encourage buyers to increase revenue through improved operations, property upgrades, or other strategies.

The report noted that investors looking for yield are likely to turn to tertiary metros, where 40% of trades occurred in 2023. That’s because smaller cities face less supply pressure and are attracting more in-migration from tenants in search of a lower cost of living.

At the same time, investors have to consider rising costs that are squeezing profit margins. Insurance is up 120% over the past four years, average property taxes have climbed 40% since 2018, and labor costs are higher.

Marcus & Millichap also identified a “generation gap” within the investor community that could influence which groups are most active in 2024. It found those who came of age after the global financial crisis of 2007-2009 think in terms of a 2.5% average Treasury rate and rent growth of more than 5%. The “older” generation active from 1990 to the early 2000s are more familiar with 5.5% Treasury rates and 3.5% rent growth – a situation more comparable to today’s.