The Multifamily Advantage in a Changing Interest Rate Environment

As investors, you are constantly faced with choices.

Should I invest or save? Who do I invest with? What do I invest in?

It can seem overwhelming.

The reality is that the answers are different for each investor. While we can’t guide you on when to invest or who to invest with, our job is to inform you as much as possible.

Frankly, there are opportunities in all asset classes, if you know where to look. In the real estate universe, there is opportunity in office, manufactured housing, storage, retail, debt, and multifamily, to name a few.

Our expertise is in the multifamily world, particularly workforce housing that gives us the opportunity to create alpha (profit) for our investors, through forced appreciation from renovation and meticulous management.

So, why do we focus on multifamily properties?

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The Multifamily Advantage

Resilient Demand

Despite recent economic fluctuations, rental housing remains strong. According to Newmark’s 1Q24 Multifamily Capital Markets Report, demand surged in the first quarter of 2024 with 103,826 units absorbed, representing the largest first-quarter total since 2000 and outpacing the long-term first-quarter average by 2.7 times. This demand underscores the sector’s resilience and potential for steady returns.

Favorable Renting Economics

The spread between homeownership and apartment rental costs grew $824 in the first quarter of 2024, increasing 18.4% year over year. This widening gap continues to make renting a more attractive option for many, particularly in the workforce housing segment where Carbon focuses a majority of its investments. Mortgage applications for home purchases have declined to a near-14-year low, further supporting the rental market.

Supply and Demand Dynamics

While new supply continues to break records, with 135,652 units delivered in Q1 2024, the pace of growth is expected to slow in the latter half of the year. This potential supply-demand rebalancing could create favorable conditions for well-positioned properties like those in Carbon’s portfolio.

Vacancy and Rent Trends

Year-over-year, vacancies rose 66 basis points to 5.9% nationally in Q1 2024.However, the pace of vacancy growth is slowing on an annualized basis. Rent growth is projected to increase throughout 2024, reaching 2.0% year-over-year as new supply is set to slow in the second half of the year. At Carbon, we believe rent growth will accelerate as we enter 2026 and beyond.

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Carbon's Strategic Approach

At Carbon, we’re positioning ourselves to capitalize on these market dynamics:

Focus on Workforce Housing: Our emphasis on this sector aligns with the growing demand for affordable rental options, especially as the cost gap between renting and owning widens.

Strategic Marketing Selection: We target markets with strong demographic trends and employment growth, positioning our investments for long-term success.

Value-Add Opportunities: Our expertise in identifying and improving underperforming assets allows us to create significant value through strategic renovations and operational improvements.

Debt Strategy: Though we don’t count on declining interest rates, we’re strategically positioning our portfolio to take advantage of potential refinancing opportunities as rates potentially stabilize or decline. We are good if rates don’t drop – and better if they do!

Distress opportunities: With $669 billion in multifamily loans maturing between 2024 and 2026 (Newmark), there is opportunity to acquire some properties at significant discounts, which translates to higher returns for our investors.

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Market Challenges and Opportunities

While the multifamily sector shows resilience, we’re mindful of certain obstacles:

1. Rising Expenses: Multifamily expenses increased 6.5% year-over-year, led by a 36.1% surge in insurance costs. Our efficient management practices help to mitigate these impacts.
2. Evolving Capital Markets: Investment sales volume totaled $20.6 billion in Q1 2024, decreasing 25.3% year-over-year. However, multifamily remains the largest share of investment sales among all US commercial real estate property types at 26.2%.
3. Cap Rate Compression: The spread between major markets and non-major market cap rates totaled 25 basis points in Q1 2024, 69.1% below the long-term average. This presents opportunities in select non-major markets where Carbon operates.

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Looking Ahead

As interest rates potentially stabilize or decline, we anticipate improved refinancing opportunities and potential cap rate compression, which could enhance returns for our investors. Our focus on workforce housing in strategic markets, combined with our value-add expertise, positions Carbon to capitalize on these evolving market conditions.

We remain committed to providing our investors with strong, risk-adjusted returns while creating value in the communities where we invest. As always, we’re here to answer any questions you may have about our strategy or the broader multifamily market.