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September 19, 2022

Freddie Mac’s Multifamily Investment Indicator Makes Record Drop

Paul Bergeron, Globe, 19 September 2022

Historic figures were recorded in the Freddie Mac Multifamily Apartment Investment Market Index (AIMI) for Q2 as it decreased nationwide on both a quarterly and annual basis, driven primarily by record mortgage rate growth.

The nation and 11 markets experienced their largest annual AIMI decline in the history of the index. AIMI overall fell by 11.7% in Q2, with the index down 17.9% compared with the second quarter of 2021.

The AIMI index takes into account employment, multifamily permits, net operating income and property price and helps investors determine how the relative value of investing in multifamily properties in select major metros.

Mortgage rates increased by 131 bps – the largest annual increase in the entire history of AIMI, which dates to 2000. Last week, the 30-year fixed rate topped 6%.

During the past year, property prices have experienced significant growth, rising by 21.8%; net operating income (NOI) grew by 17.7% and mortgage rates increased by 1.31 percentage points, the largest increase in the history of AIMI.

National NOI growth was 3% and every metro experienced growth. Miami was the top performer, growing at a 4.7% clip and the weakest was Phoenix, which grew at 0.5%.

This Won’t Feel ‘Normal’ or ‘Fun’

David Fletcher, Managing Director, Head of Acquisitions at Excelsa Properties, tells that from the beginning of Q1 2022 to the mid-September 2022, US Treasury rates have increased, high-yield debt financing has all but left the building and agency spreads have fluctuated between 160bps and 200bps.

“This volatility has pushed cap rates higher but not as much as would have been the case without the exceptional rent growth seen in most of the United States,” Fletcher said.

Removing unprecedented rent growth will massively reduce the option value of buying a 4% cap rate in a 3.4% 10-Year Treasury Rate (2.97% SOFR) environment, he said.

“The massive rent growth will not last much longer,” Fletcher added. “Multifamily investors will be forced back to a world where one makes money by generating current yield and doing hard work to develop and improve properties.

“While that is normal to anyone in the business longer than three years, the shift away from ultra-low cap rates and 80% LTV loans at sub 4% interest rates will not feel normal or fun.”

Best Transactions Take Place During Market Disconnects

Neil Schimmel, CEO of Investors Management Group (IMG) tells, “Investors can capture good value through disciplined buying in down or slowing markets.

“IMG is the busiest it has ever been with three acquisitions, a refinance, and three dispositions in progress,” Schimmel said. “The best transactions take place during market disconnects, so I expect more attractive entry points ahead.”

Schimmel said he’s buying in metros like Atlanta or Greenville, S.C., where renter demand is driving property values.

“Our Class B apartment assets are conservatively positioned to perform through cycles,” he said.

Compared to the rampant development of subprime markets prior to 2008, tighter credit standard has rebuilt stability in the housing market and longer-term fixed-rate mortgages.

Fewer Can Qualify for Home Loans

Doug McKnight, President and chief investment officer at RREAF Holdings, tells that the sharp rise in interest rates, and resulting rapid rise in mortgage rates, have resulted in fewer buyers able to qualify for home loans.

“This has pushed more and more families to remain, or turn to, rental properties, both single-family and multifamily,” McKnight said.

“Resulting growth in NOI and the continual dropping in vacancy rates have pushed up values in the rental market, as market rents continue an upward trend.

McKnight said that at some point there will be a rise in cap rates as leverage moves to negative territory and this will likely result in a decline in rental asset values as markets adjust.

“RREAF continues to be net buyers of multifamily properties with a keen focus only on markets where migration and economic growth continue to show signs of strength, allowing us to maintain returns to investors,” he said.

Current Buyer Pool Shrinking

Jeff Thompson, chief financial officer at P.B. Bell, tells that with rising interest rates, home ownership is not as attainable in the current market and that has kept the renter base strong.

“We’ve seen that the pool of investors in multifamily acquisitions has been dropping off as interest rates increase,” Thompson said. “Even as the current buyer pool shrinks, and we’re seeing a lower volume of offers within the industry, people are still buying and selling. Multifamily is still an attractive investment among other forms of real estate offerings.

“On the development side, ground-up development hasn’t been significantly impacted. The multifamily market in the Phoenix metro area continues to benefit from strong population and job growth.”

Freddie Sees ‘Moderating’ Investment Decisions

Steve Guggenmos, vice president of research & modeling at Freddie Mac Multifamily, said in prepared remarks, “Although higher rates and property prices have driven the index down, NOI growth remains strong.

“The drop in AIMI this quarter reflects moderating investment conditions brought about by changing trends in the broader economy. There still exists an overall housing shortage which is keeping vacancy rates low and rents high.”