Dive brief:
- Multi-family yields have been falling for a year now. However, a quarterly report from the National Council of Real Estate Investment Trustees said declines in the sector, which stood at a total market value of $254 billion, were not as steep in the second quarter of 2023 as they had been previously.
- Quarterly returns for apartment investors fell 1.04% nationally in the second quarter of 2023, according to the NCREIF Property Index. They fell 2.10 in Q1, after falling 3.21 in Q4 2023. The last positive quarter was Q3 2022, when stocks rose 1.20%. Over the past year, they were down 5.10%.
- For the entire US commercial real estate market, valued at $895 billion, yields fell 1.98% in the second quarter after falling 1.81% in the first quarter. Over the past year, they were down 6.60%. Hospitality led the way with a 4% increase in the second quarter, while the struggling office market lagged across all sectors with a 5.79% drop.
Diving knowledge:
The NCREIF Property Index is an unleveraged composite of total returns of private commercial real estate properties held for investment purposes only. The Index Properties are acquired, at least in part, on behalf of tax-exempt institutional investors and are held in a fiduciary environment.
Apartment investors saw results vary by region in the second quarter. In the Midwest, returns were 0.16%, which were the only positive figures for the quarter. In the West, stocks experienced the biggest fall with 1.80%.
Refunds vary across the country
| region | P2 | Last 4 quarters |
| East | -0.55% | -3.90% |
| south | -0.85% | -2.48% |
| mid west | 0.16% | -3.78% |
| west | -1.80% | -8.47% |
SOURCE: NCREIF Property Index
Regardless of investor type or region, yields on traditional condos have been shrinking since the Federal Reserve began raising interest rates in the spring of 2022. And for now, many observers expect that problem to persist.
“Time will tell whether this trend continues in the coming quarters, and interest rates have been stubbornly high at the start of the third quarter, which is weighing on valuations,” Colliers said in a recent index analysis.
New approaches
The uncertain landscape has forced apartment investors to change their strategy. California-based Plenty of Places Apartments is switching to buying newer apartment properties as it becomes more difficult to make the numbers work for value-added offerings.
“We’re looking more towards new, more turnkey [acquisitions], realizing that now is not the time to focus on traditional value-added multifamily,” said Michael McClearn, acquisitions manager and operations coordinator for Plenty of Places. “There is slowing rental growth , interest rates are rising and selling prices have softened. We’re not seeing the same kind of returns in traditional value-add.”
For others, it may not be the right time to purchase an apartment. Boston-based Kingbird Investment Management, the real estate subsidiary of Puerto Rico’s family-owned strategic investment company, Grupo Ferré Rangel, look for returns of 12% to 15%. To reach these numbers, the company is making changes.
“You can no longer invest capital in multifamily and get amazing returns,” said Mark Pasierb, president of Kingbird. “We’re realigning our view and a lot of that will be focused on the interim, which will probably be preferred equity and maybe mezz debt to get those returns.”
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