Multifamily Real Estate in 2024: Navigating Turbulence and Seizing Opportunities

The year ahead for the multifamily real estate market holds a unique set of challenges and prospects. With both high interest rates and weather-related catastrophes anticipated to continue into the new year, multifamily property stakeholders in the Midwest and beyond should prepare to contend with an array of issues that could cut into their bottom lines. Savvy owners and operators will find opportunity in risk management.

Forecasting profitability

About one-third of the housing in the United States is multifamily and the average landlord owns three properties, with more than half managing their own buildings.

Since 2020, there has been an average of 700 new multifamily units built daily, which has flooded the nationwide market. As a result, a slowdown in rent growth was reported in the third quarter of 2023 of just +1.1%. This surge in new offerings, coupled with tightening access to financing, has led to a 60% drop in new construction starts within the last year.

Yet, amidst this market volatility, certain regions within the U.S. remain resilient. The Midwest has emerged as a burgeoning hub for multifamily investments. This is especially true for West Michigan’s multifamily rental market, which boasts an impressive rent collection rate that exceeds 96% — the strongest in the country.

Investors in the multifamily market are attracted to the Midwest because of its diversified economy, steady economic expansion and low unemployment rates, which has created a stable environment for real estate. Its lower cost of living and business operations compared to other regions contributes to higher rental yields, making the area a magnet for investors seeking portfolio expansion. With numerous ongoing projects underway across the region, long-term investment opportunities continue.

The forthcoming profitability prospects for multifamily real estate hinge upon location and the prevailing economic climate. Each city will have its own inflationary forces and prolonged high interest rates, anticipated to affect investor confidence. The aftermath of the COVID-19 era could witness a wave of lease renegotiations, downsizing or non-renewals, directly influencing profit margins. This impact will be more apparent across the commercial real estate market among portfolios with assets more heavily focused in the commercial office and select retail space.

Despite Michigan’s stable market indicators, economic uncertainties cast a prolonged shadow, with over 70% of real estate executives in HUB’s Executive Outlook Survey flagging economic challenges and unpredictability as the primary threats to real estate profits in 2024. This apprehension is apparent in the notable outbound migration from Michigan to other states; Michigan is ranked fourth in outbound movers across the nation.

Locally, Michigan’s demographic landscape is undergoing a shift from major urban centers to the surrounding suburbs, as seen in the growth of the top three cities in west central Michigan, particularly around the Grand Rapids area. As investors flock to leverage the region’s attractive blend of affordable living costs and consistent economic expansion, the area remains primed for sustained growth. Despite economic flux across the country, Michigan multifamily real estate showcases resilience, spotlighting Midwest markets as models of adaptability amid high-interest rates and tempered rent growth.

Adaptability as a crucial virtue

To remain resilient in 2024, real estate owners and operators should plan ahead and be more intentional about the design of their insurance programs. The real estate insurance sector should anticipate heightened costs, especially in disaster-prone regions. Escalating property values, legal expenses and a surge in severe weather incidents collectively have caused insurance rates to rise across multiple coverages.

Furthermore, insureds can expect additional underwriting scrutiny and costs related to assets located in areas with high crime scores. Whether an established asset, new build, or under construction, high-crime areas create concern for underwriters, and the need for advanced security measures. Site security and enhanced controls can be a costly investment and should be considered when budgeting.

Another consideration that real estate owners and operators should be aware of is tenant occupancy. This is another area of underwriting scrutiny that has become more prevalent, particularly with industrial properties and with portfolios with mixed-use.

Multifamily property owners and operators nationwide must prepare for difficult policy renewals, particularly concerning catastrophic peril and residential property insurance. Alternative risk financing solutions should be evaluated and aligned with insureds’ risk tolerance in collaboration with lender, investor, and partner requirements. Solutions such as integrated or structured programs, higher deductibles, self-insurance, and captives are potential strategies that could help the industry navigate current challenges.

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