October 2024 Insights: Third Quarter Review
Economic Update
Last month, the Federal Reserve made a significant move by cutting the Federal Funds rate by 50 basis points after holding rates steady for several months. Many operators and investors saw this as a strong indication that interest rates would start trending downward. However, the opposite occurred in the treasury market, with the 10-year Treasury yield rising about 64 basis points in just over a month, from 3.65% to 4.29%. This increase was influenced by various factors, including slightly higher-than-expected CPI data for September, suggesting inflation may be more persistent than anticipated. This highlights the Fed’s greater influence on short-term rates, while the long end of the yield curve remains more sensitive to inflation expectations.
In light of this, market expectations for future rate cuts have been tempered. Whereas a 25-50 basis point cut was anticipated at the next Fed meeting, there is now a 98% probability of a 25-basis point decrease, with no expectation for a 50-basis point cut.
For the multifamily sector, many operators rushed to refinance with their lenders when rates temporarily dipped before the Fed’s rate cut, only to see their chances disrupted by the volatility that has defined the market over the past two years.
Multifamily Fundamentals
Apartment fundamentals remained subdued through the end of September. Annual occupancy stood at 94.4%, a slight year-over-year decrease of 0.1%. Demand for apartments held strong from July to September, with 192,000 units absorbed in the third quarter, surpassing the 162,000 units delivered. Year-over-year rent growth was modest at 0.2%, while monthly effective rents saw a slight decline of 0.5%.
As operators, our focus is always on optimizing processes to maximize rents. The graph below illustrates the month-over-month effective rent changes for 2024, which have closely tracked those of 2023 within a 10-basis-point range up until September. This reveals two key insights:
- Rental demand follows a predictable seasonal cycle, with peak demand occurring from spring to early summer and a slowdown during fall and the holiday season. This seasonality is a critical factor we take into account when setting rental prices and occupancy projections for our properties.
- Despite record-high new deliveries, demand has remained robust, reinforcing our confidence in the multifamily asset class as a strong investment.
Cap Rate Reset
Although interest rates have risen over the past month, sentiment around the multifamily market has strengthened significantly compared to the past two years, as cap rates have widened ~150 basis points since the 2022 lows. This reset in cap rates is strikingly similar, from both a magnitude (~150 basis point) and timeline (~2 years), to what we saw in 2008 – 2010 during the Great Financial Crisis.
Cap rates have begun to stabilize due to reduced volatility in the capital markets, as the Fed hiking cycle is in the rearview mirror and they are now focused on easing. According to the chart below by CBRE, cap rates are expected to decline going forward, providing potential tailwinds to multifamily (and all CRE property) investors.
What We Do
We are strategic real estate investors.
At Vanamor, we combine an institutional approach with an often overlooked middle-market focus to employ a flexible and disciplined investment philosophy. Our goal is to provide stable cashflow with above-market total returns. Since inception, Vanamor has averaged a greater than 33% annual return with an average of 8% annual cashflow distribution.
