Is there Any Reason to Be Bullish on Multifamily Right Now?

[Scott Trench]

Hi Folks,

I just wrote an update to my prediction of a multifamily crash from 2023. 

I looked at supply, demand, interest rates, and current pricing to create my outlook. 

And, I was surprised. I was biased going into the research that 2024 would be "go time" - that the "Crash" in valuations would present buying opportunities in a historic way. 

But, even after a huge crash in 2023, I can't see any hope for multifamily valuations. I just can't wrap my head around how the average multifamily property at current pricing, after an already historic crash, makes any sense. 

Everything is working against multifamily. 

Cap Rates are at 5% while agency debt is 5.5-6.5%. 

The 10-year is as low as it can reasonably get without many, many Fed Rate cuts, not just the three planned for 2024. 

There is the most supply ever coming online with 986,000 multifamily units currently under construction. Way more multifamily units (not even counting another 675,000 single family units under construction) than new household formations coming for 2024.

Operating expenses, including taxes, insurance, maintenance, etc. are skyrocketing, and likely not all fully absorbed in the average property.

And, alternatives that produce more cash flow than a 5% cap rate (average for prime multifamily real estate currently) with less work and less risk, like private lending, short-term treasuries, money market accounts, etc. 

I'm looking at the averages and it seems to me that cap rates could rise from 5% to 7-8% before they are in line with historical spreads vs debt yields. Another 30-40% decline in asset values with no NOI growth.

Am I missing something? Any bulls for multifamily out there that think that it makes sense to buy right now?