2022 Multifamily Real Estate Mid-Year Update

As we cross the halfway point for 2022, we’d like to take a moment to share our latest thinking in three areas: (1) the macroeconomic picture and how it influences multifamily fundamentals, (2) top priorities for the Trion Properties team, and (3) key business updates.

The macroeconomic picture and multifamily fundamentals

In short, the fundamentals for our value-add multifamily strategy are poised to remain strong through the balance of 2022. That said, we are closely watching several “big picture” factors. The central themes remain rising interest rates and high inflation, as the pandemic, conflict in Ukraine, and domestic instability seem to be simmering in the background (for now).

Rising interest rates

The Federal Reserve (Fed) hiked its key interest rate 75 bps in June. As consumer prices continue their steep rise, markets are expecting another large hike at the end of July—perhaps even a full percentage point—followed by an additional rate increase in September.

At the moment, it’s unclear if the Fed will engineer a soft landing or not—but one thing is already apparent: higher interest rates are hurting the affordability of single-family homes. As shown below, 30-year fixed residential mortgage rates have more than doubled since their recent low in 2021, crossing above 5% for the first time since 2009.

Mortgage rates are still relatively low by historical standards but have climbed enough to deter prospective homebuyers. With home prices at historic highs—the median existing-home sales price just exceeded $400,000 for the first time—today’s mortgage rates present a sizeable hurdle. A slowdown in sales activity is already evident: In May, existing-home sales declined for the fourth consecutive month, with sales down 8.6% from one year ago. Further sales declines are expected in the coming months.

In this context, many families continue to see better value in renting vs. buying, which supports demand for multifamily housing. Preliminary estimates for Q2 show strong rent gains driven by tight vacancy, with national growth rates reaching double digits.

At Trion, we are positioning for success by focusing on strategic deals in the best submarkets where uniquely strong demand is fueling long-term rent growth. As it pertains to managing the cost of financing, we are fixing rates when possible and using derivatives to hedge risk on floating-rate debt. We have also purchased multiple assets in the last year with assumable long-term fixed-rate debt.

Inflation

US consumer inflation hit a new four-decade high of 9.1% in June, with jumps in prices for gasoline, food, and shelter driving much of the increase. There are no obvious signs that we’re in the clear yet, although some experts are predicting inflation will moderate in 2023.

As we have outlined before, multifamily real estate is positioned for resilience in an inflationary environment. Apartment leases usually have terms of just one year, often with monthly extensions after the first year. As such, leases can be frequently repriced to reflect inflation and capitalize on increased demand.

It's also worth noting that, amid an environment of record-high material costs and labor shortages, new multifamily development is slowing. In May, multifamily housing starts declined 23.7% month-over-month and permits dropped nearly 10%. A shrinking supply pipeline works in our favor by giving more room for existing assets to grow rents and appreciate in value.

Rising construction and labor costs also impact our value-add projects—but this is a dynamic we are prepared to manage. By vertically integrating our operations and continually pursuing operational improvements, we are positioned to maximize efficiency and keep costs in check. In addition, the rent growth we are able to capture on renovated units provides a cushion for rehab expenses.

Eyes on the horizon: Top priorities for our team

We continue to focus on investing in markets with strong fundamentals that support our value-add strategy. As always, we are working to identify markets and submarkets where we can successfully operate throughout the real estate cycle by emphasizing sustainable growth supported by a diverse set of economic drivers and favorable supply-demand dynamics. We continue to grow our platform and expand into the Southeast to take advantage of migration patterns and their associated upward pressure on rents.

Looking ahead, we are especially focused on risk management and bolstering the recession-resistant characteristics of our properties and portfolio. This means exercising discipline with debt, taking a conservative approach to underwriting assumptions, maximizing cash flow, and staying focused on efficient property management.

Key business updates

Highlights during the first half of the year included:

Off-market acquisition of Terra Village

• 402-unit community in Edgewater, CO, a suburb of Denver
• At $108.75 million, this marks the firm’s largest acquisition to date.
• We capitalized on a unique opportunity to acquire this stand-out asset at an attractive basis. By completing strategic upgrades, we will be able to unlock tremendous value potential, as the community meets an underserved need for quality apartments at an affordable price point in a rapidly growing metro area.

Sale of the Andina Apartments for 20.09% investor IRR

• 89-unit property in Hayward, CA
• First disposition for Trion Multifamily Opportunity Fund II

Sale of Edison Apartments for 47.51% investor IRR

• 64-unit apartment community in Gresham, OR, a suburb of Portland
• We purchased this newly built property just as it obtained a certificate of occupancy in 2020, identifying it as an excellent opportunity to add a modern multifamily community to our portfolio at far below replacement cost. We leveraged the strength of the property, the location, and the increasing demand for suburban life to lease up the asset and generate a significant return within just 18 months.