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    Is Multifamily Overbuilt?

    enJune 08, 2024

    Podcast Summary

    • Multifamily market oversupplyIn Sunbelt cities, the multifamily market has seen significant overbuilding due to population trends and remote work, leading to a potential boom and bust cycle with decreasing rents and a liquidity crunch for developers

      The multifamily market, particularly in Sunbelt cities, has seen significant overbuilding due to population trends driven by remote work and desirability for warmer climates. This has led to a mismatch in supply and demand, resulting in decreasing rents and a potential boom and bust cycle. According to Real Page Market Analytics, 2023 saw a 36-year high in new apartment deliveries, with an expected 50-year high in 2024. This oversupply, combined with a liquidity crunch faced by developers, could indicate the beginning of a boom and bust cycle. Renters may benefit from decreasing rents, but investors should exercise caution.

    • Multifamily Housing Market TrendsDespite growth in some cities, affordability issues in coastal markets are causing lower multifamily housing growth. Development starts have decreased, and peak deliveries are expected mid-2024. Mortgage rates and equity requirements for large multifamily buildings contribute to the current state and future direction of the market.

      While some cities like Austin, Phoenix, and Charlotte are experiencing significant growth in multifamily housing stock with over 14% increases this year, coastal markets like New York, LA, and Boston are seeing much lower growth. This trend is due to affordability issues, with renting being cheaper than buying in many markets due to higher mortgage rates. However, this boom cycle may be entering a bust as development starts have decreased by 40% in Q4, 2023, and deliveries are expected to peak mid-2024. Additionally, the mortgages for large multifamily buildings work differently than for homes, with developers looking at shorter-term, floating-rate mortgages and needing significant upfront equity to acquire or develop the property. These factors contribute to the current state of the multifamily housing market and its potential future direction.

    • Multifamily apartment development costsHigher interest rates and increased costs have made multifamily apartment development more expensive, leading to fewer new starts and challenges for developers, particularly smaller ones, who may be facing a liquidity crunch due to higher debt costs and slower rental growth.

      Constructing or acquiring multifamily apartment buildings today is much more expensive than it was just a few years ago due to higher interest rates and increased costs. This has led to a significant decrease in new apartment starts, making it a challenging environment for developers, particularly smaller ones who may not have adequately accounted for rising rates and other economic shifts. For instance, developers who underwrote deals based on low interest rates and full occupancy are now facing higher debt costs and slower rental growth, leading to a liquidity crunch. Even large players like Mid-America Apartments, which builds slightly more affordable apartments in desirable areas, are facing oversupply issues and declining stock prices as a result. Overall, the apartment development market is facing headwinds, and the extent of these challenges remains to be seen.

    • MAA's resilience in apartment marketDespite slowing rent growth, MAA's better absorption rates, lower resident turnover, and higher renewal rents indicate resilience in the apartment market. Tight housing market and high mortgage costs keep tenants from leaving for homes, benefiting MAA.

      Mid-America Apartment Communities (MAA) is holding up better than expected amidst the current headwinds in the apartment market. Despite rent growth slowing down to flat to negative in recent quarters, MAA's recent results show better absorption rates, lower resident turnover, and higher renewal rents. The tight housing market and high mortgage costs are keeping first-time home buyers from entering the market, resulting in the lowest tenant moveouts due to home purchases in history. MAA's smart acquisitions and development strategies, particularly in markets outside of central business districts and sub belt areas, have helped them benefit from net migration. Additionally, their strong balance sheet positions them well to take advantage of the current market conditions by providing financing or taking over projects from struggling smaller developers. While the market may be more pessimistic about MAA, with a dramatically dropped FFO multiple, the speaker argues that the discount may be unwarranted given MAA's best-in-class track record and ability to access non-recourse capital markets for debt.

    • REIT liquidity advantageMid-America REIT's ability to issue unsecured senior debt sets it apart, allowing it to capitalize on current market conditions and protect assets. REITs, especially those in data centers, industrial warehouses, and infrastructure, offer inflation protection and attractive valuations.

      Mid-America Real Estate Investment Trust (REIT) has a unique advantage over other REITs due to its ability to issue unsecured senior debt, while others may be burdened with recourse debt. This liquidity allows Mid-America to capitalize on the current market environment and protect its assets. Additionally, the REIT sector as a whole, which is currently the only sector in the S&P 500 with negative year-to-date returns, is being overlooked despite historically performing well in high inflation and interest rate environments. REITs, particularly those in sectors like data centers, industrial warehouses, and infrastructure, offer inflation protection and pricing power. The Motley Fool's Real Estate Winners service is a resource for investors interested in exploring REIT opportunities, and the sector's current depressed valuations make it an attractive investment option.

    • Motley Fool PodcastThe Motley Fool podcast hosts have personal interests in stocks discussed, but they're not financial advisors. Always do your own research and consider consulting a financial advisor before making investment decisions.

      While the hosts of the Motley Fool podcast may have personal interests in the stocks they discuss, it's important to remember that they are not financial advisors. The Motley Fool does have formal recommendations for certain stocks, but listeners should not base their buying or selling decisions solely on the information provided in the podcast. Always do your own research and consider consulting a financial advisor before making investment decisions. Additionally, Mary Long reminds us that we'll be back tomorrow for more discussions on the stock market.

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