Bernard's Corner: Multifamily Expected to Remain Resilient Despite Banking Challenges
Dear readers,
I hope you are doing well. I'm excited to share the latest updates on the market and our company with you.
Despite recent challenges in the banking sector, the multifamily market remains strong, with the U.S. asking rents increasing for the first time since fall 2022. For more information, please see the Yardi Matrix report.
Following the collapse of Silicon Valley Bank (SVB), the U.S. banking sector is undergoing significant changes. The 25 largest U.S. banks gained $120 billion in deposits while smaller banks lost $108 billion. This shift will impact lending standards and have downstream effects on real estate and Agency CMBS sectors. Although multifamily will be affected, we anticipate its resilience in comparison to other sectors, such as office, retail, hospitality, and industrial. Fannie Mae and Freddie Mac agency debt, which is exclusive to multifamily, remains unaffected by recent banking issues, ensuring multifamily operators continue to have options.
While the Federal Reserve recently raised rates by 25 basis points, longer-term rates, like the 5-year and 10-year treasury rates, have actually decreased. This is because the market anticipates that rates will decrease over time. As shown in the graph below, the 5-year treasury bond yield has dropped from 4.40% in November 2022 to 3.2% in May 2023 – a 120 bps difference. During the same period, the Fed Funds rate was increased 125 bps! We aren’t claiming a negative correlation here, but just saying.
Regarding lending in real estate, tightened credit standards may negatively affect property values that don't qualify for agency debt. Thankfully, our properties either qualify or are being positioned to qualify as we complete stabilization. We remain vigilant and prudent, recognizing that limited liquidity and higher interest rates could have broader implications for fixed income and real estate.
According to Peter Linneman's spring edition of the Linneman Letter, the banking issue primarily affects small business owners and developers, not treasuries. His historical analysis proves that debt scarcity has been an excellent time to invest in real estate, with multifamily consistently delivering strong returns, especially during these periods. You can listen to Linneman's quarterly broadcast on the Walker Webcast by Walker & Dunlop’s Willy Walker.
Blackstone's BREIT has limited redemptions but has also raised a record-breaking $30.4 billion for its Blackstone Real Estate Partners X fund. This indicates that there is plenty of "dry powder" waiting for opportunities. While we will be on the lookout for opportunistic deals, we don't plan to sit on the sidelines waiting for asset prices to bottom out, as the best opportunities may already be here.
We're excited to announce our new Masterclass series focused on multifamily investing. These classes held twice monthly and free of charge, will offer valuable insights and tools to simplify the investment process. Stay tuned on our social media platforms for upcoming sessions or request an invitation here.
Thank you for your continued trust in us. We look forward to our ongoing journey together.
Warm regards,
Bernard
Managing Partner