Returns for apartments continue to fall

Dive Brief:

  • Multifamily returns have been falling for a year now. However, a quarterly report from the National Council of Real Estate Investment Fiduciaries said the declines for the sector, which sat at a total market value of $254 billion, weren’t as sharp in the second quarter of 2023 as they had been previously.
  • Quarterly returns for apartment investors dipped 1.04% nationally in the second quarter of 2023, according to the NCREIF Property Index. In Q1, they fell 2.10, after dropping 3.21 in Q4 2023. The last positive quarter was Q3 2022, when values rose 1.20%. Over the past year, they declined 5.10%.
  • For the entire U.S. commercial real estate market, valued at $895 billion, returns fell 1.98% in Q2 after dropping 1.81% in Q1. Over the past year, they declined 6.60%. Hospitality led the way with a 4% increase in Q2, while the struggling office market lagged all sectors with a 5.79% fall.

Dive Insight:

The NCREIF Property Index is an unleveraged composite of total returns for private commercial real estate properties held for investment purposes only. The properties within the index have been acquired, at least in part, on behalf of tax-exempt institutional investors and held in a fiduciary environment.

Apartment investors saw results vary by region in Q2. In the Midwest, returns were at 0.16%, which were the only positive numbers in the quarter. In the West, values saw the most significant drop at 1.80%.

Returns vary around the country
Region Q2 Last 4 quarters
East -0.55% -3.90%
South -0.85% -2.48%
Midwest 0.16% -3.78%
West -1.80% -8.47%

SOURCE: NCREIF Property Index

Regardless of the type of investor or region, returns have been squeezed for traditional apartments since the Federal Reserve began raising interest rates in the spring of 2022. And for right now, many observers expect that issue to persist.

“Time will tell if this trend holds in future 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 analysis of the index.

New approaches

The uncertain landscape has forced apartment investors to change strategy. California-based Plenty of Places Apartment Homes is shifting to buying newer apartment properties as it becomes harder to make the numbers work for value-add deals.

“We’re looking more toward newer, more turnkey [acquisitions], realizing that now is not the time to focus on traditional value-add multifamily,” said Michael McClearn, acquisitions manager and operations coordinator for Plenty of Places. “You’ve got rent growth slowing down, interest rates going up and sales prices softening. We’re not seeing the same kind of returns on traditional value-add.”

For others, the time may not be right for any apartment acquisition. Boston-based Kingbird Investment Management, the real estate subsidiary of Puerto Rico-based family-owned strategic investment company Grupo Ferré Rangel, seeks returns from 12% to 15%. To hit those numbers, the firm is making changes.

“No longer can you just invest equity in multifamily and get amazing returns,” said Mark Pasierb, president of Kingbird. “We’re readjusting our view and a lot of that will be focusing on the interim, which will most likely be preferred equity and maybe mezz debt to hit those returns.” 

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