The Biden Administration is targeting “junk fees” in multifamily properties, prompting discussions about fee transparency and distinguishing legitimate fees from actual “junk fees.”
Meanwhile, the anticipated interest rate hike by the Federal Reserve is expected to tighten lending conditions further in the multifamily sector, potentially impacting deal-making, and transaction volumes.
Amidst these challenges, understanding the current multifamily landscape, by staying informed about the evolving trends and challenges can position multifamily investors for potential opportunities in this market cycle.
Biden Administration Takes Aim at Multifamily “Junk Fees”
The Biden Administration recently announced plans to target “junk fees” in the multifamily industry, including charges for pest control, applications, and credit checks. The move prompted responses from industry leaders. The National Multifamily Housing Council (NMHC) supports fee transparency but emphasizes the difference between legitimate fees for extra services and actual “junk fees.” They argue that most professionally managed property owners already disclose fees voluntarily and comply with state and local laws.
Rental Platforms & Some States Commit to Transparency
To address the issue of hidden fees, the Biden Administration secured commitments from rental housing search platforms, including Zillow, Apartments.com, and AffordableHousing.com, to enhance transparency. Apartments.com is launching a new calculator to determine the all-in price of a home, while Zillow will introduce a “Cost of Renting Summary” on its rental listings. Additionally, several states, including Colorado, Rhode Island, Minnesota, Connecticut, Maine, Montana, and California, have taken action to tackle hidden fees on the state level.
Experts Urge Fair Fee Assessments
Some multifamily and real estate experts believe that the conversation about junk fees should consider legitimate fees that lenders collect for various third-party services. While fee transparency is generally accepted in the industry, some experts believe there will be newfound commitment to increase upfront and honest costs across the industry.
NMHC Backs Fee Transparency & Calls for Dialogue
The NMHC strongly supports full fee transparency, but it’s noted that the recent commitments made by rental housing search platforms were voluntary and may not have a significant impact on the “junk fee” issue. The National Apartment Association also emphasizes support for increased transparency and dialogue between residents and multifamily operators. However, they highlight that additional services come at a cost, and policymakers should consider the industry’s operational realities and the contribution of fees to the viability of rental housing offerings.
Generally Supported but What Comes Next
While the Biden Administration’s plan to target junk fees has raised concerns and led to calls for more transparency, industry leaders and experts believe that distinguishing between legitimate fees and actual “junk fees” is essential. Fee transparency is generally supported, but it’s emphasized that fees often cover necessary services and contribute to the viability of rental housing offerings.
Fed Rate Hike Likely. How Does This Impact Multifamily Investors?
Anticipated 25 Basis Point Rate Hike
The Federal Reserve is expected to raise interest rates by 25 basis points at its next meeting, ultimately impacting deal making and multifamily sector. Despite the cooling economy, core inflation remains too high in the Federal Reserve’s opinion, leading experts to anticipate at least two more quarter point rate hikes this year. The strong job market complicates the Fed’s decision-making ability, with wage growth contributing to ongoing inflation.
Scarce Lending and Stringent Barriers
The assumed upcoming rate hikes will further tighten lending conditions further in the multifamily sector, reducing demand and transaction volumes. The high cost of debt remains a key impediment to lending, leading to declining property values and cautious lending practices. However, lenders continue to prioritize assets with reliable long-term cash flows in strong stable markets.
Other Sectors Faring Worse
Certain other CRE sectors are faring worse, like office, which faces challenges due to long-term hurdles and high vacancy rates, leading to dire predictions for the office sector’s future. Depending on the economy’s performance and interest rate adjustments, higher transaction volumes could resume, especially if uncertainty decreases.
Closely Monitor & Consider the Impacts
Multifamily investors should closely monitor how the Federal Reserve’s Stance on employment data, wage growth, inflation trends, and consider the potential rate increases and how they might impact dealmaking and market sentiments.
Multifamily Real Estate Market Challenges: Understanding the Challenges and Opportunities
Sliding demand in downtown areas, coupled with high-interest rates, poses a significant threat to multifamily owners. Additionally, a substantial debt maturity wall of commercial real estate loans, amounting to $500 billion in 2024 and $2.5 trillion over the next five years, is looming in the background.
Frozen Capital Markets and Price Discovery
Capital markets have frozen, leading to a lack of understanding of asset values. With limited assets being traded, the absence of price discovery adds to the industry’s uncertainty. Until clarity is achieved, navigating through this environment remains challenging.
The “Extend and Pretend” Policy
The OCC, FDIC, and federal government recently issued policy guidance, offering a “pretend and extend” approach to troubled-debt restructuring. This policy aims to work with qualified borrowers and quality assets to re-create the value that once existed, providing an 18- to 36-month extension in some cases. While some have criticized the approach, it is geared towards supporting the regional banking system, which currently holds a significant percentage of real estate debt.
Multifamily Property Price Trends
According to the MSCI Real Capital Analytics report, multifamily property prices in June were down 11.7% from the previous year, reflecting the largest year-over-year decline among the asset class on recent record. However, multifamily property prices experienced the smallest month-over-month decline compared to other property types.
Stabilization in Multifamily Prices
While recent price changes have reversed the gains seen during the pandemic, multifamily property prices have somewhat stabilized for the time being. They currently remain slightly above the long-term trend line representing a mean reversion to pre pandemic prices.
Commercial Property Prices Below Trend
Despite multifamily property prices showing some stability in recent months, overall commercial property prices have fallen 2.7% below the long-term trend line, signaling a challenging market.
The multifamily real estate market is facing challenges in certain markets due to higher interest rates and uncertainty. Understanding challenges caused by the frozen capital markets, lack of price discovery, and the “extend and pretend” policy can help investors navigate this uncertain landscape. While multifamily property prices seem more stable than other commercial property asset classes, it is crucial to exercise caution and consider the broader market conditions when making investment decisions right now. Staying informed and keeping up to date about the evolving trends and challenges, multifamily investors can position themselves for potential opportunities in this dynamic market.
Top Transaction News
Bell Partners Purchases Two Desirable Communities in Texas & Florida
Bell Partners, a leading apartment investment and management company with over 85,000 apartments spanning across the U.S., recently acquired two multifamily communities in separate transactions.
- Lansbrook Village, a 774-unit apartment community in Palm Harbor, Florida. The property will be renamed Bell Lansbrook Village. Bell Lansbrook Village, constructed in 1998 and 2004, and offers a variety of floor plans in a low-density community with top-tier amenities, conveniently located near downtown Tampa and St. Petersburg
- Presidio East, a 312-unit apartment building in Fort Worth, Texas. The property will be renamed Bell Presidio. Bell Presidio, constructed in 2017, features modern interior finishes and a mix of larger floorplans appealing to diverse prospective residents. The property is situated in North Fort Worth, near Alliance Town Center, top-ranked schools, and major employment centers.