Crittenden held its annual multifamily conference in Grapevine, Texas on May 8 and 9, as seasoned leaders gathered to discuss the forecast for the future and insights to help multifamily owners and developers plan for success. During the many engaging panel discussions, several themes emerged regarding supply and demand, inflation, financing costs, and more.
Supply is Surging
The multifamily industry is adjusting to a huge increase in new properties hitting the market. In 2023, some 430,000 market-rate units were delivered; in 2024, a further 660,000 units are expected to come online. This surge in supply is widely distributed across the country: 27 of the 50 largest markets set new supply-delivery records last year. In many of these markets, including Dallas and Houston, occupancy rates have also declined to their lowest level in many years.
Rental Demand Stays Robust
Despite the big boost in supply, demand for multifamily units is strong. In fact, the 100,000 units absorbed from January to March were the most for any first quarter on record. Absorption has been particularly strong in much of Texas. Houston and Dallas, for instance, have experienced the first and second strongest recovery rates, respectively, among the nation’s largest markets; in Dallas, occupancy rates have stabilized around 90%.
Long-term renters are becoming more numerous as well—a trend encouraged by both unaffordable home prices in many areas and changing lifestyle preferences, especially among younger people. For these and other reasons, the build-to-rent model is growing increasingly popular, especially in land-abundant states like Texas.
Fewer New Deals
“Razor-thin” yield margins and increased financing costs have contributed to a significant slowdown in new development deals. Some developers are pausing new projects to allow the current supply of multifamily units to be absorbed. Other developers were delaying new projects in the expectation that the Federal Reserve would soon cut interest rates—though recent developments on inflation, employment, and GDP growth have dashed such hopes.
For its part, Freddie Mac is “not wavering” on its commitment to financing multifamily housing, with $30 billion so far allocated this year and another $40 billion still available. Developers might consider Freddie Mac’s workforce housing preservation product, which offers better pricing and credit terms in exchange for rent restrictions on a share of a property’s units.
Operating Costs Rising
This is especially true in places like Texas. Houston has seen insurance premiums increase by up to 300% in recent years, adding significant pressure to operating costs. In many parts of the Lone Star State, property taxes look to be rising too: early reports suggest that the latest round of property assessments are up to 30% higher than a year ago. To help mitigate the impact of higher property taxes, investors should embrace proactive tax-management strategies, such as grieving taxes effectively.
Investors go Further Afield
Many secondary and tertiary markets are receiving more attention than in the past, as investors try to avoid negative leverage. In Texas, for example, smaller markets like Lubbock, Amarillo, and El Paso are enticing investors, thanks to favorable long-term rental demographics and steadier demand. Whether the market is big or small, however, having a strong knowledge of local dynamics is critical to success; preparing for longer holding periods can also make for good strategy in current conditions.
For investors looking to hedge against interest-rate uncertainty, Freddie Mac’s index lock product—which allows interest rates to be locked in at the application stage—may be an attractive option. Other creative financing solutions should also be on investors’ radars. Preferred equity, for instance, can offer flexibility: Some preferred equity deals involve “soft pay” structures with no immediate cash-flow requirements.
