Despite setbacks and uncertainties, multifamily investors can plan for the future by staying informed and open to the possibilities of change in the coming months.
New markets require new approaches and new tactics. Experts and industry leaders will take the stage at Inman Connect New York in January to help you navigate the market change and prepare for the next one. Meet the moment and join us. register here.
As we find ourselves in uncertain financial times, I believe caution is particularly important when formulating investment strategies for the coming year. Certainly that is the approach I prefer.
Past performance is the main determinant of financial planning: it examines how things have developed in the past and moves forward accordingly. But this year in the business of investing in real estate and multifamily business, it is unwise for anyone to think that rents will continue to grow as fast as they have for the last year or two. In fact, there seems to be a bit of a slowdown already.
I don’t think it’s going to be negative rent growth, but it will go back to the pre-pandemic norm. It’s been double-digit rental percentage growth over the last year. Just projecting with everything going on, it will be closer to 3 or 4 percent in most markets. That makes a dramatic difference in the process, in terms of where you think you’ll be next year.
The other part of the investment equation is the use of debt. When there is long-term debt on existing assets, no adjustment is necessary. The same for loans, if you were able to obtain them during the last year in the range of 3 percent, and if they are fixed and long-term.
But people should be aware of the current interest rate environment if they have loans that are due or need to be refinanced now or sometime in the next year.
The same if they have made new acquisitions. Those in that boat can expect a much higher cost of interest, or cost of maintaining debt service, than in the past.
advice and strategy
Rod Khleif, real estate investor, mentor, and coach, provided an introduction to the current investment environment in a Forbes post, noting that historically high inflation rates have prompted the Federal Reserve to raise interest rates to a pace not seen since 2018.
He cited other evidence of trouble, including a bearish stock market, the specter of layoffs and revised earnings forecasts for several companies. Additionally, he noted that mortgage applications were at their lowest level in 22 years.
While these are certainly uncertain times, they are not comparable to 2020, when the pandemic first hit the US. At that time there was even a certain degree of panic, a feeling that we had never seen anything like it. And we didn’t. But the multifamily sector didn’t just survive; prosperous.
With the current economy, I have a feeling, at least in my mind, that we’ve seen this before. Those of us who have been in business for a while have seen the cycles. We have seen the ups and downs. It is manageable.
It just requires adjustment and recalibration, instead of just sticking your head in the sand and assuming that everything is going to continue as it has for the last two years.
Planning for 2023
With that in mind, here are three tips to help you solidify your multifamily investment plan for 2023:
-
No plan is foolproof: Any projection of where you will be a year, two years, or three years from now is wrong, 100 percent of the time. Fortunately for all of us in the multi-family business, it’s gone downhill in recent years. But knowing that expectations don’t match reality, you need to be prepared to make adjustments on the fly. Who knows how long the interest rate environment will remain elevated? I don’t know. Depends on which economist or which day of the week you read someone on The Wall Street Journal.
-
Remain calm: None of these developments represent an existential threat or major disruptive event for the industry. It’s just a correction. The fundamentals of the business remain very solid.
-
Keep things in perspective: Having followed my father and grandfather into the real estate business, I learned about the ebbs and flows of the economy and never allowed myself to be unsettled. I was recently discussing with someone the fact that the interest rate for a multifamily purchase is five, which some people think is very high, compared to when it was three. Being a guy who had been, I said, “I remember when I got a commitment from the bank years ago, and they agreed to provide us with debt and an interest rate of 7 percent. And I was giving myself a high five, thinking, it’s amazing how cheap this is.” We managed to survive that very well.
The bottom line is that multifamily real estate investors should formulate their plans with their eyes wide open, knowing that they will in all likelihood have to revise those plans in the coming weeks and months. Yes, there are some worrying economic trends. But the sector remains on solid footing, and looks set to continue to be.
Michael H. Zaransky is the founder and CEO of MZ Capital Partners in Northbrook, Illinois. Founded in 2005, the company deals in multi-family properties.