Or not. Apartment buildings—aka multifamily buildings—have been a sound investment for sound investors, but the investments aren’t all that these days, because the investors aren’t all that these days.
Apartment-building values fell 14% for the year ended in June after rising 25% the previous year, according to data company CoStar.
But even at that, apartment building values still were up more than 7% on the two years. On the other hand,
[u]nlike office buildings and malls, which have been hit hard by remote work and e-commerce, rental apartments have low vacancy rates. The apartment sector’s main problem isn’t a lack of demand—rents have soared since 2020—it is interest rates.
Oh yeah. Debt and the associated interest vig. That’s where investors, who used to have a plan, stopped having serious plans, or walked away from the ones they had. There exists, today, $2 trillion in apartment building mortgage debt, double that of a decade ago. That, by itself, shouldn’t be a problem, but. But, but, but.
Most apartment loans are fixed-rate, long-term mortgages. During the pandemic, however, investors took out more shorter-term, floating-rate loans.
The warning signs were obvious, though: increasing lock-down and related government overreactions to the pandemic already were leading to increasing rent payment delinquincies, to say nothing of Federal government-mandated rent payment deferrals; inflation pressures from the Federal government’s panicky pandemic-related spendings and bailouts that were already predicting a need to raise interest rates; and on and on. Why move away from the stability of long-term mortgage borrowing, except in the hopefulness of being able to flip the property or keep raising (unpaid and increasingly unpayable) rents to cover the rising debt costs of floating rate loans, when the loans would need to be rolled, soon, into ever higher interest rate loans?
Even in investing, it’s optimal to dance with the girl what brung you, to stick to your original plan, no matter how many hot, can’t miss, deals show up.