{"id":156550,"date":"2023-08-09T12:34:43","date_gmt":"2023-08-09T18:34:43","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=156550"},"modified":"2023-08-09T14:56:14","modified_gmt":"2023-08-09T20:56:14","slug":"multifamily-market-could-see-catastrophic-declines-by-end-of-2024","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/multifamily-market-could-see-catastrophic-declines-by-end-of-2024","title":{"rendered":"Multifamily Real Estate Could See a Catastrophic Decline in Values by the End of 2024\u2014What That Means for Investors"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">For several months now, I and many others at BiggerPockets have been cautioning that the&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/multifamily-real-estate-is-on-the-brink-of-crashing\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">multifamily market is at severe risk of declining property values<\/span><\/a><span data-preserver-spaces=\"true\">\u2014even as the residential market proves resilient. But has a \u201ccorrection\u201d or perhaps even a \u201ccrash\u201d materialized in the multifamily market? Let\u2019s take a look.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">The National Multifamily Market is in Bad Shape<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">As a brief primer, multifamily assets (along with many other commercial asset classes) are valued based on\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/net-operating-income\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">net operating income (NOI)<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0and\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/cap-rate-real-estate\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">cap rates<\/span><\/a><span data-preserver-spaces=\"true\">. When NOI increases, it puts upward pressure on values. In contrast, when cap rates rise, it puts downward pressure on values.\u00a0<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">What we\u2019ve seen on a national level over the course of 2023 are conditions that don\u2019t look good for multifamily property values.&nbsp;<\/span><\/p>\n\n\n\n\n\n\n  <div class=\"lg:block\" x-data=\"{ ad_block_block_64d3db86b4650: popAds(1) }\">\n      <template x-for=\"ad in ad_block_block_64d3db86b4650\">\n        <a\n          :href=\"ad.linkURL\"\n          class=\"no-underline text-black\"\n          x-on:click=\"adClicked('https:\/\/www.biggerpockets.com\/blog\/multifamily-market-could-see-catastrophic-declines-by-end-of-2024', ad.sponsor, ad.title, ad.id, 'blockAdClicked', 'blockAd', '')\"\n          target=\"_blank\">\n          <div\n            class=\"py-4 border-b flex flex-col flex-nowrap text-sm border-t px-0 rounded-none\"\n            x-init=\"\n              analytics.track('blockAdLoaded', {\n                referrer: 'https:\/\/www.biggerpockets.com\/blog\/multifamily-market-could-see-catastrophic-declines-by-end-of-2024',\n                sponsor: ad.sponsor,\n                ad_title: ad.title,\n                ad_page_location: ''\n              })\n            \"\n            x-intersect:enter.once=\"adViewed('https:\/\/www.biggerpockets.com\/blog\/multifamily-market-could-see-catastrophic-declines-by-end-of-2024', ad.sponsor, ad.title, ad.id, 'blockAdViewed', 'blockAd', '')\">\n            <div><span class=\"text-xs text-slate-light block bg-slate-50 p-1 inline-block rounded-md\">Sponsored<\/span><\/div>\n            <div class=\"flex items-center text-sm space-x-4\">\n                <img :src=\"ad.imageURL\" :alt=\"ad.imageAlt\" class=\"h-10 w-10 object-cover rounded-full\">\n\n                <div clas=\"text-sm\">\n                    <span class=\"font-bold block\" x-text=\"ad.sponsor\"><\/span>\n                    <span class=\"text-slate\/80\" x-text=\"ad.description\"><\/span>\n                <\/div>\n            <\/div>\n\n            <div>\n                <span class=\"font-bold\" x-text=\"ad.title\"><\/span>\n                <p class=\"mt-2 text-slate\/80\" x-text=\"ad.body\"><\/p>\n                <span class=\"mt-2 text-themeBlue block mt-2 underline\" x-text=\"ad.linkTitle\"><\/span>\n            <\/div>\n          <\/div>\n        <\/a>\n      <\/template>\n  <\/div>\n\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Rising cap rates<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">First, we have rising cap rates. Cap rates can rise for all sorts of reasons, as they are a function of investor sentiment, but the cost of capital, a glut of supply, and slowing rent growth are some of the main reasons cap rates have risen in recent months. According to CoStar, the average market cap rate has risen from 4.9% to 5.6% from Q2 2022 to Q2 of this year.&nbsp;<\/span><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1999\" height=\"806\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/08\/image3-1.jpg\" alt=\"Average Market Cap Rate - CoreLogic\" class=\"wp-image-156555\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/08\/image3-1.jpg 1999w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/08\/image3-1-300x121.jpg 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/08\/image3-1-1024x413.jpg 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/08\/image3-1-768x310.jpg 768w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/08\/image3-1-1536x619.jpg 1536w\" sizes=\"auto, (max-width: 1999px) 100vw, 1999px\" \/><figcaption class=\"wp-element-caption\"><em>Average Market Cap Rate &#8211; <a href=\"https:\/\/www.corelogic.com\/\" target=\"_blank\" rel=\"noreferrer noopener\">CoreLogic<\/a><\/em><\/figcaption><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">This may not sound like a lot, but it makes a big difference in valuation. As an example, take a property with a net operating income of $100,000. One year ago, the average market cap rate in the U.S. was 4.9%. This would give this fictional property a roughly $2.04M value ($100,000\/.049). Fast forward one year and the average market cap rate in the U.S. is now 5.6%, making the property worth about $1.78M\u2014a 13% decline in value in just one year.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Slowed growth<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">But cap rates are just one side of the equation here. If NOI were to grow, it could offset rising cap rates. Happily, for multifamily investors, rental income has grown year-over-year but at a much slower pace than has been seen in over a decade.&nbsp;<\/span><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1999\" height=\"768\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/08\/image2-1.jpg\" alt=\"Vacancy and Market Asking Rent Per Unit - CoreLogic\" class=\"wp-image-156554\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/08\/image2-1.jpg 1999w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/08\/image2-1-300x115.jpg 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/08\/image2-1-1024x393.jpg 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/08\/image2-1-768x295.jpg 768w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/08\/image2-1-1536x590.jpg 1536w\" sizes=\"auto, (max-width: 1999px) 100vw, 1999px\" \/><figcaption class=\"wp-element-caption\"><em>Vacancy and Market Asking Rent Per Unit &#8211; CoreLogic<\/em><\/figcaption><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">This slowdown in rent growth is due to a variety of factors, such as a glut of supply and rising vacancy. According to&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.realpage.com\/analytics\/july-2023-apartment-market-update\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">RealPage<\/span><\/a><span data-preserver-spaces=\"true\">, rent growth is now under 1% YoY, meaning it is not even keeping up with inflation. Rising rents could theoretically help offset rising cap rates, but from CoStar\u2019s data, it\u2019s not enough.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">These two things combined have led to lower sales prices for multifamily assets, particularly among higher-tier buildings. Looking at the chart below, you can see four and five-star buildings (subjective rankings from CoStar) have fallen much faster than three-star buildings, which are relatively flat.&nbsp;<\/span><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1999\" height=\"758\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/08\/image1-1.jpg\" alt=\"Sale Price Per Unit - CoreLogic\" class=\"wp-image-156553\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/08\/image1-1.jpg 1999w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/08\/image1-1-300x114.jpg 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/08\/image1-1-1024x388.jpg 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/08\/image1-1-768x291.jpg 768w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/08\/image1-1-1536x582.jpg 1536w\" sizes=\"auto, (max-width: 1999px) 100vw, 1999px\" \/><figcaption class=\"wp-element-caption\"><em>Sale Price Per Unit &#8211; CoreLogic<\/em><\/figcaption><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">On a broad national level, multifamily assets are in a correction. Of course, what happens in each individual market and each individual asset class is different.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">While no one knows for certain what will happen next, if you believe CoStar\u2019s forecasts (which you can see in the charts above), multifamily prices are poised for further declines. Costar is forecasting cap rates to continue marching upward to an estimated 6.5% towards the end of 2024. During that time, rents are projected to grow 4% nationally. If all this came true, at the end of 2024, we could expect a value of roughly $1.6M\u2014an additional ~10% decline from where we are today and a more than 20% decline peak-to-trough.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">What Does This Mean for Investors?<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">With multifamily pricing facing downward pressure, combined with turmoil and uncertainty in commercial lending, it\u2019s a time for caution in this asset class. There can and will certainly be deals, particularly if there is seller distress or if you plan to add value. But be very selective about what you buy and where. There are likely to be many headwinds in the multifamily space for the foreseeable future.&nbsp;<\/span><\/p>\n\n\n\n    \n  <div id=\"visibility-group-block_33e7adea028df61e7144edd667ee2716\" class=\"visibility-group  hidden\">\n        \n\n<div id=\"hero-block_94d581eb80aed5006e301aa0e317d748\" class=\"first:mt-0 hero-block py-4  alignwide   has-background has-theme-gold-light-background-color has-text-color has-theme-gold-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-theme-gold-color has-text-color has-large-font-size wp-block-paragraph\" style=\"font-style:normal;font-weight:800\">Get the Best Loan Today<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color wp-block-paragraph\" style=\"font-size:16px\">Find trusted, <em><strong>investor-friendly<\/strong><\/em> lenders who specialize in your strategy. <\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><\/p>\n\n\n\n<div id=button-custom-event-block_3c9ce9214ae335e132b65b3e9ee7eeb9 class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/business\/finder\/lenders\" x-on:click=\"window.analytics.track(&#039;Blog Block | B2C Marketplace Lender Finder&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/multifamily-market-could-see-catastrophic-declines-by-end-of-2024&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-gold-background-color has-text-color has-white-color\" target=\"_blank\">Find a Lender<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\" first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/Marketplace-Blog-Blocks-Lender-v3.png\" alt=\"investor friendly lender, investor friendly real estate loans\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n  <\/div>\n  \n\n\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n    \n  <div id=\"visibility-group-block_64dd31c79f00f\" class=\"visibility-group  \">\n        \n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div id=\"hero-block_64dd2875dba9d\" class=\"first:mt-0 hero-block py-4    has-background has-slate-100-background-color has-text-color has-theme-slate-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<h3 class=\"wp-block-heading my-0 tracking-tight font-extrabold has-theme-slate-dark-color has-text-color has-large-font-size\">Join the community<\/h3>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color wp-block-paragraph\" style=\"font-size:16px;font-style:normal;font-weight:400\">Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more. <\/p>\n\n\n\n<div id=button-custom-event-block_64dd2888dba9e class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/signup\" x-on:click=\"window.analytics.track(&#039;Blog Block | Acquisition | Free Membership Signup&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/multifamily-market-could-see-catastrophic-declines-by-end-of-2024&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Sign Up<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n            <\/div>\n<\/div>\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n  <\/div>\n  <\/div><\/div>\n","protected":false},"excerpt":{"rendered":"<p>The multifamily market has been on the brink for a while, but new data shows a dire outlook through the end of 2024. Here&#8217;s what you need to know.<\/p>\n","protected":false},"author":108611,"featured_media":156561,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[8,7357],"tags":[],"class_list":["post-156550","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-trends","category-multifamily-real-estate-investing"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/156550","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/108611"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=156550"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/156550\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/156561"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=156550"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=156550"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=156550"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}