Lument Study Highlights Challenges and Strategies for Multifamily Investors

While the last 18 months have been challenging for the multifamily industry, stakeholders have a “guardedly optimistic view” about the coming year, according to a new study from Lument regarding the challenges facing middle-market multifamily investors.

To gauge industry sentiment, Lument partnered with market research firm Beresford Research to complete 300 surveys with executives working for conventional multifamily and affordable housing developers and investors in the third quarter of 2023.

According to the study, survey respondents said they expect to see the market gridlock begin to break up. Nearly half of the respondents, 48%, said they see 2023’s record deliveries being absorbed and supply/demand dynamics continuing to serve as an active driver for the market. A slowdown in the single-family market and the growth in household formation are also key tailwinds for the market, reported respondents.

However, headwinds remain for respondents, with 35% citing the cost of borrowing as the top impediment. Insurance costs, real estate reassesments and tax increases, and wage and materials inflation are also key concerns.

Uncertainty remains around the bid-ask gap, with 42% of respondents saying they felt it was narrowing and 34% still considering it a headwind. In addition, 33% predicted that cap rates will remain the same, and 53% said they will rise slightly over the next 12 months.

According to Lument, a notable finding from the survey is that nearly all respondents, 90%, reported that their companies would most likely be net sellers over the next 12 months, representing a shift from the hold positions many have taken over the past year.

“The reasons for this change in owner sentiment likely include pending debt or investment maturities, desire to create liquidity for future investments, and concern over rising costs,” stated the study. “For instance, the firsthand experience that net sellers have had with operating expenses has certainly affected their thinking.”

Additional key findings from the study include:

  • Fifty-seven percent of respondents said they will be focusing on investments in the West during the coming 12 months; the Southeast came in last among respondents at 49%;
  • Affordable housing executives are focused on solutions to make projects more feasible, with 32% citing tax relief and 25% citing expansion of the low-income housing tax credit;
  • Nearly one-third of conventional multifamily executives, 29%, also cited real estate tax relief as the change that would have the most impact in allowing them to provide affordable units in their communities, followed by lower interest rates for loans including affordable housing;
  • Almost all of the survey respondents, 98%, reported that insurance costs are an issue for their companies. Because of the skyrocketing costs, 60% said they have put development of new properties on hold, and 50% said they have withdrew or curtailed investments in markets that are prone to natural disasters; and
  • In terms of strategies to mitigate or offset sharply the skyrocketing insurance costs, 39% said they are self-insuring or creating a captive insurance company, followed by 38% passing on some of the costs to tenants through higher rents and 38% withdrawing from markets with higher insurance costs.

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