7 Takeaways from NMHC’s Annual Meeting

Here are 7 observations from the National Multifamily Housing Council’s Annual Meeting this week:

1) Optimism is back. Much different from this time last year. Not that 2024 will be a banner year. It will likely be a slog both for operations and to find deals. But the rallying call seems to be: “It’s not getting worse!” – mirroring comments made last week by Blackstone’s Jon Gray that CRE prices are bottoming. There’s improved perceived clarity with rates, pricing, op-ex (even insurance!), supply and demand.

2) Fundamental demand for apartments is strong and should remain strong – though still short of supply in 2024. Improved consumer confidence, a resilient job market plus wages outpacing rents all add up to robust demand. (And don’t give too much credit to high home prices and mortgage rates. Apartment renters who would have bought a house likely rented SFR instead.)

3) “Heads on beds” remains the strategy. Operators continue to give on price to maintain occupancy given the 50-year high in completions hitting in 2024. And diminished loss-to-lease means there’s less upside on renewals. Retention is still tough. Even Class B/C operators are seeing impact from lease-ups in high-supply areas, where their best residents are getting lured up-market. Demand is out there, but it's a very competitive market where renters have the power.

4) Construction starts continue to plunge – which means substantially less supply by late 2025 and into 2026-27 (and improved revenue outlook by then). You can get construction loans but at lower loan-to-cost ratios, which means more equity. But a lot of equity that had been targeting ground-up development has shifted to potential lease-up distress.

5) Expense growth will outpace revenue growth in a lot of markets in 2024, but the silver lining is that expense pressures are showing signs of mitigating. I heard stories of owners thrilled to get insurance premiums renewed in the low single-digits – which would be huge if it sticks.

6) Values could be bottoming, and cap rates settling in the mid 5% range. Some think lower. Everyone seems to be targeting deals in the upper 5% or 6%+ range, but there are few sellers at those prices for well-located, institutional grade Class A/B apartments. Buyers seem more resigned to reality that anything priced more favorably is likely to be an older, more challenged asset in less-desirable submarkets. Still unclear how much volume we'll see but seems likely more than 2023.

7) Investors are increasingly resigned to seeing relatively little distress (among institutional-grade assets) hit the market in 2024. Much will get worked out behind the scenes or extended, while others could be “loan to own” situations where debt funds take over the assets and wait out better pricing. Even preferred equity capital are finding surprisingly few opportunities, though I suspect that might change with more challenged lease-ups in 2024.