Small Multifamily Investment Trends Report Q1 2023

Cash Flows Remain Resilient as Valuations and Cap Rates Feel
Interest Rate Pressure

Key Findings

Small multifamily prices slid 2.6% from the previous quarter, as new purchases and originations activity slowed.
Cap rates posted the largest quarterly jump since 2009, finishing at 5.4%.
Debt yields rose and LTVs plummeted as lending standards tightened amid financial sector volatility.

Table of Contents

State of the Market
Lending Volume
Arbor Small Multifamily Price Index
Cap Rates & Spreads
Expense Ratios
Rent Collections
Leverage & Debt Yields
Outlook

State of the Market

Through the first quarter of 2023, the small multifamily subsector lies in a unique position, battling financial sector headwinds on one side while benefiting from structural tailwinds on the other.

After the failures of Silicon Valley Bank and Signature Bank in March, lenders, especially regional banks with less stringent capital requirements and greater interest rate risk exposure, have become more conservative. As a result, new purchases and originations of small multifamily properties saw much lower levels of activity than in previous quarters.

The recent banking sector distress has been primarily driven by the Federal Reserve’s ongoing monetary policy tightening cycle. In the 13 months ending in March 2023, the Federal Reserve hiked interest rates a total of 475 bps in nine different policy meetings. Over the short term, the economy must learn to adapt to higher interest rates.

At its May 2023 meeting, the Fed raised rates by 25 bps as expected. However, some relief may be on the horizon. Markets are betting that the Fed will begin cutting interest rates by the end of the summer. Similarly, the central bank has communicated that it foresees a less stringent interest rate environment in the short term, with the federal funds rate expected to average 4.3% in 2023 and come back down to an average of 2.5% over the longer run.

Despite significant headwinds, the small multifamily subsector is weathering the ongoing storm impacting the commercial real estate industry. A challenging environment for homebuyers combined with a resilient labor market has created an economic climate where there is more demand for rental housing units, and tenants are, by and large, maintaining their ability to pay rent. As noted by Freddie Mac in their 2023 multifamily outlook, so long as the labor market remains healthy, “tailwinds will keep the multifamily market performing in 2023,” albeit at “more modest levels compared with the prior few years.” While financial market conditions could restrain new activity, the structural health profile of small multifamily households remains largely intact — a factor that should allow the sector to limit distress between now and when a period of interest rate normalization arrives.

Lending Volume

The year-end 2022 estimate of new multifamily lending volume on loans with original balances between $1 million and $7.5 million¹ — including loans for apartment building sales and refinancing — fell to $83.9 billion (Chart 1).

The 2022 estimate indicates there was a modest 10.9% deceleration from 2021’s record high of $94.1 billion. Initial estimates of small multifamily lending in 2023 reflect a market environment that is currently in a pause. The annualized level of small multifamily lending activity during the first quarter came in at just $15.5 billion — which would represent the lowest annual total on record since 2010.

A significant factor contributing to the drop off in new small multifamily originations has been the reduced incentive to engage in cash-out refinancing. Borrowers often use accrued equity in their properties to finance subsequent acquisitions. However, cash-out refinancings in today’s market environment would likely mean a voluntary increase in debt servicing costs. Refinancings accounted for just 53.4% of tracked small multifamily originations during the first quarter of 2023 — a 15.6 percentage point decrease from the previous quarter (Chart 2).

Arbor Small Multifamily Price Index

As measured by the Arbor Small Multifamily Price Index² , small multifamily asset valuations fell 2.6% quarter-over-quarter. Still, thanks to a runup in prices through mid-2022, prices were 7.4% higher than a year earlier (Chart 3).

Negative pricing pressures in the current environment are not unique to either multifamily or the small asset subsector. An effect of the Federal Reserve’s fight against inflation is higher costs of capital. As a result, potential buyers of all property types have higher required yields that need to be met before a deal can begin to make sense. While multifamily owners seemed content to hold firm on pricing last year, late-2022 and early-2023 data indicate that some seller capitulation is taking place, leading to higher cap rates and a softening of prices.

Cap Rates & Spreads

For the first time in over a decade, cap rates across all commercial property types are rising, including multifamily and the small asset subsector. The Federal Reserve is in the midst of one of its most rapid monetary tightening cycles in history and its full effects are still filtering through the economy. Multifamily cap rates are just one of the many risk pricing measures that investors are re-evaluating in real-time. After small multifamily cap rates reached a record low of 5.0% in the third quarter of 2022, they have since risen in two consecutive quarters, rising to 5.4% during the first quarter of 2023 (Chart 4). Measured quarter-over-quarter, small multifamily cap rates rose by 25 basis points — the largest single increase on record since 2009.

The small multifamily risk premium, which is best measured by comparing cap rates to the yield on the 10-Year Treasury, is a measurement of additional compensation that investors require to account for higher levels of risk. In the first quarter of 2023, this metric rose for the first time in a year and a half, increasing to 173 bps (Chart 5).

Quarter-over-quarter, the small multifamily risk premium jumped by 43 bps — its largest increase since mid-2019. The cap rate spread between small multifamily assets and the rest of the multifamily sector, a measure of the risk unique to smaller properties, fell 6 bps during the quarter, to finish at 30 bps (Chart 6).

Expense Ratios

Expense ratios, measured as the relationship between underwritten property-level expenses and effective gross income, jumped significantly, rising 427 bps quarter-over-quarter to 45.5% (Chart 7). This sharp increase likely reflects a recent slowdown in rent growth, which was flat for multifamily properties during the quarter, according to Yardi Matrix. A slowdown in rent growth has historically impacted the amount of income a property generates — putting downward pressure on effective gross income and increasing expense ratios.

Rent Collections

On-time rent payments in small multifamily properties reached their highest levels since the onset of the pandemic, according to Chandan Economics and RentRedi’s Independent Landlord Rental Performance Report. In March 2023, full rent was paid on time in an estimated 85.5% of units — improving 197 bps from the month prior (Chart 8).

More on-time rent payments signal that, despite financial market turbulence, economic distress has not substantially filtered down to rental households. Tenants have maintained their ability to pay rent, and as a result, property-level cash flows appear to be secure.

In this environment of economic uncertainty, the resilient underlying health of rental households is among the most reassuring factors for the small multifamily sector. As long as the cash flow ecosystem between tenants, property owners, and lenders remains intact, the probable range of downside scenarios will remain limited.

Leverage & Debt Yields

While the equity side of the capital stack has shifted to reflect economic and financial market volatility over the past half-year, the debt side has maintained a conservative stance since the onset of the pandemic. Even so, the first quarter of 2023 showed that underwriting standards have room to tighten further. Loan-to-value ratios (LTVs) have slid in each of the past four quarters as lenders are increasing their requirements for how much capital borrowers need to have at risk. Small multifamily LTVs fell to 60.6%, dropping by a substantial 439 bps from the prior quarter (Chart 9).

Debt yields for small multifamily loans averaged 9.0%, rising 99 bps from the previous period — the largest quarterly jump in the history of Chandan Economics’ post-global financial crisis tracking (Chart 10). The inverse of debt yields, the debt per dollar of net operating income (NOI), fell for small multifamily loans. Small multifamily borrowers secured an average of $11.18 in new debt for every $1 of property NOI, down $1.38 from the previous quarter and reaching the lowest level since 2015.

Together, these LTV and debt yield trends indicate that underwriting standards remain conservative amid heightened economic uncertainty and financial sector volatility. To protect against distress, lenders are working in larger equity and property-income cushions.

Outlook

The small multifamily subsector will continue to be tested over the next several months. However, the asset type has developed structural fortification to ensure it will bend rather than break. The Mortgage Bankers Association found that delinquencies in the multifamily sector have remained negligible, reporting a mere 20 bps increase during the first three months of 2023. Moreover, according to the Federal Reserve Bank of New York’s recently released 2023 SCE Housing Survey, the share of renters who anticipate buying a home in the next three years has fallen to a nine-year low (42.2%) — a factor that should continue to support demand for rental housing. The intersection of the small multifamily subsector and naturally occurring affordable housing (NOAH) is a potential tailwind to watch. With every state in the U.S. not having enough affordable housing to meet demand, public support for the small multifamily subsector is substantial and growing, including from Fannie Mae and Freddie Mac. All things being equal, balance sheet asset valuations and new deal volume will likely continue to show sensitivity to sustained higher interest rates over the short term, although the intact structural demand profile of the sector will enable it to absorb downside pressures better than many other commercial real estate asset classes.

For more small multifamily research and insights, visit arbor.com/articles

¹ All data, unless otherwise stated, are based on Chandan Economics’ analysis of a limited pool of loans with original balances of $1 million to $7.5 million and loan-to-value ratios above 50%.

² The Arbor Small Multifamily Price Index (ASMPI) uses model estimates of small multifamily rents and compares them against small multifamily cap rates. The index measures the estimated average price appreciation on small multifamily properties with 5 to 50 units and primary mortgages of $1 million to $7.5 million. For the full methodology, visit arbor.com/asmpi-faq.

Disclaimer
All content is provided herein “as is” and neither Arbor Realty Trust, Inc. or Chandan Economics, LLC (“the Companies”) nor their affiliated or related entities, nor any person involved in the creation, production and distribution of the content make any warranties, express or implied. The Companies do not make any representations regarding the reliability, usefulness, completeness, accuracy, currency nor represent that use of any information provided herein would not infringe on other third party rights. The Companies shall not be liable for any direct, indirect or consequential damages to the reader or a third party arising from the use of the information contained herein.

Small Multifamily Investment Trends Report Q4 2022

Valuations Flatten as Cap Rates Start to Rise from Record Lows

Key Findings

Small multifamily originations reached $80.7 billion in 2022, the highest annual total after 2021’s record high.
Cap rates inch higher from record lows, ticking up to 5.1%.
Debt yields rise and loan-to-value ratios (LTVs) hold near post-pandemic lows as lending standards remain tight.

Table of Contents

State of the Market

Lending Volume

Arbor Small Multifamily Price Index

Cap Rates & Spreads

Expense Ratios

Rent Collections

Leverage & Debt Yields

Outlook

State of the Market

During a volatile 2022, the Federal Reserve’s ongoing monetary tightening cycle began to accomplish its intended goal. Inflation came down for six consecutive months through December 2022. Although slowing inflation has generated optimism, the central bank has stated that it may still need to raise interest rates again in 2023.

How changing economic conditions will impact the small multifamily sub-sector is only now beginning to become clear. The Mortgage Bankers Association’s 2023 forecast noted that cap rates appear “to be reflecting past market conditions that have changed significantly over recent months.” If elevated interest rates are sustained, commercial real estate pricing, including within the multifamily sector, is at risk of market fluctuations.

However, as noted in Arbor’s Special Report Spring 2023 by Arbor Chairman and CEO Ivan Kaufman and Sam Chandan, Founder of Chandan Economics, growing storm clouds in the multifamily sector are not reflective of any structural change in the profile of demand or supply but rather are a cyclical feature. Moreover, while multifamily and the small asset sub-sector are not immune from disruption, there are significant supporting factors that should limit distress. Debt underwriting standards have remained tight since the onset of the pandemic, which should curb the scope of mortgage defaults. Further, the structural undersupply of quality affordable housing options will continue to support tenant demand, and Fannie Mae and Freddie Mac will continue to buttress liquidity.

On balance, while the small multifamily sector remains in a fortified position entering 2023, it will likely feel reverberations from ongoing macroeconomic instability.

Lending Volume

The year-end 2022 estimate of new multifamily lending volume on loans with original balances between $1 million¹ and $7.5 million — including loans for apartment building sales and refinancing — fell to $80.7 billion (Chart 1).

The 2022 estimate represented a 14.3% annual decline from 2021’s record high of $94.1 billion, which reached lofty highs on a wave of pent-up investment demand and the anticipation of monetary tightening. Looking ahead, Freddie Mac forecasts that overall multifamily origination volume will fall again in 2023, in the range of 4% to 5%.

Even as small multifamily originations came down significantly in 2022, they remained elevated compared to any year other than 2021. 2022’s originations total measured 40% higher than 2020’s mark and 36% higher than 2019’s pre-pandemic record high of $59.2 billion.

The resilience of refinancing activity is one factor that has kept small multifamily originations at an elevated level. During the fourth quarter, loans originated for the purpose of refinancing accounted for 69.0% of small multifamily lending activity (Chart 2), despite higher financing costs. For 2022 overall, refinancings accounted for 69.4% of small multifamily lending activity, up from 63.5% in 2021.

Arbor Small Multifamily Price Index

As measured by the Arbor Small Multifamily Price Index², small multifamily asset valuations were flat in the fourth quarter of 2022, growing by 0.2% (Chart 3).

However, prices rose by 10.1% year-over-year (Chart 4).

Multifamily properties, which have an average lease of one year, have demonstrated an ability to withstand inflationary pressures due to their positive cash flows. Still, benchmark interest rate increases in the year ahead will be critical for small multifamily pricing. If Treasury yields remain elevated, new multifamily buyers will increasingly require higher property-level yields — a condition that could be satisfied through either strengthening cash flows or declining asset values.

Cap Rates & Spreads

As benchmark interest rates climbed in 2022, an inflection in small multifamily cap rates seemed likely to follow. Even as the cost of capital reached its highest levels since before the 2008 financial crisis, small multifamily cap rates approached new all-time lows as recently as the third quarter of 2022. However, cap rates have now shown some sensitivity to softening economic conditions. National average cap rates for small multifamily properties climbed to 5.1% in the fourth quarter of 2022, rising 13 bps from the prior quarter (Chart 5). This was the largest single-period increase since 2009.

The small multifamily risk premium, a measure of additional compensation that investors require to account for higher levels of risk, is best measured by comparing cap rates to the yield on the 10-year Treasury. The average small multifamily risk premium fell in the fourth quarter of 2022, sliding down to 130 bps. Even as cap rates rose last quarter, Treasurys rose faster, causing this spread to narrow by a substantial 60 bps. At the end of the year, the small multifamily risk premium sat at its lowest level since the third quarter of 2007 (Chart 6).

The cap rate spread between small multifamily assets and the rest of the multifamily sector, a measure of the risk unique to smaller properties, remained flat between the third and fourth quarters of 2022, holding at 36 bps (Chart 7).

Expense Ratios

Expense ratios, measured as the relationship between underwritten property-level expenses and effective gross income, have increased over the past two years — reflecting that when operating costs surge, it still takes time for rent rolls to adjust. After rising to a high of 43.5% at the end of 2021, expense ratios improved in 2022, dropping 95 bps during the fourth quarter to finish the year at 41.3% (Chart 8).

Rent Collections

On-time rent payments in small multifamily properties remain at healthy levels. At the start of January 2023, an estimated 81.0% of units had paid their full rent on time — improving 89 bps from the month prior (Chart 9). After a brief dip during the pandemic, on-time payment rates have been above 80% for 15 consecutive months. Despite mounting economic anxiety and a bear market for equities, rental households have maintained their ability to pay rent. As a result, small multifamily owners’ property-level cash flows have built-in security.

Leverage & Debt Yields

While the equity side of the capital stack is just now beginning to reflect the changing economic landscape, the debt side has been signaling the prudence of a conservative adjustment to risk-taking. LTVs have slid substantially this year as lenders have increased their risk requirements. While small multifamily LTVs did rise by 8 bps to land at 65.4% in the fourth quarter of 2022, they remain lower than at any point during 2020 and 2021 (Chart 10). Moreover, current small multifamily LTVs sit 234 bps lower than at the beginning of 2022 and 523 bps lower than their first-quarter 2021 peak (70.5%).

Debt yields for small multifamily loans averaged 7.9% in the fourth quarter of 2022, rising a substantial 17 bps from the previous period (Chart 11).

The inverse of debt yields, the debt per dollar of net operating income (NOI), fell for small multifamily loans. Small multifamily borrowers secured an average of $12.58 in new debt for every $1 of property NOI, down 28 cents from the previous quarter.

Together, these LTV and debt yield trends indicate that underwriting standards have remained conservative amid increased economic uncertainty. To protect against distress, lenders are building in larger equity and property-income cushions.

Outlook

The small multifamily sector remains in a resilient position heading into 2023, even as it faces cyclical challenges from a high-interest rate environment. The combination of a rent-by-necessity tenant base and declining access to affordable homeownership should continue to strengthen tenant demand. Balance sheet asset valuations are likely to show some sensitivity to higher interest rates. If Treasurys remain elevated, cap rates will need to rise to restore sufficient risk premiums. However, thanks to the strength of the labor market, renters have maintained their ability to pay their rent. As long as property-level cash flows remain stable, the scope of distress within the small multifamily sector should remain limited. While the year ahead may present challenges, the small multifamily sector boasts stabilizing fundamentals that should allow it to absorb business cycle headwinds.

For more small multifamily research and insights, visit arbor.com/articles

¹ All data, unless otherwise stated, are based on Chandan Economics’ analysis of a limited pool of loans with original balances of $1 million to $7.5 million and loan-to-value ratios above 50%.

Small Multifamily Investment Trends Report Q3 2022

Liquidity and Inflation Protection Continue to Attract Investors Even as Underwriting Standards Tighten

Key Findings

Small multifamily originations are on pace to hit $85.1 billion in 2022, sliding from 2021’s record high.
Cap rates hold at 5.0%, despite rising benchmark interest rates.
Underwriting standards tighten as LTVs fall and debt yields tick up.

Table of Contents

State of the Market
Lending Volume
Arbor Small Multifamily Price Index
Cap Rates & Spreads
Expense Ratios
Leverage & Debt Yields
Outlook

State of the Market

After a record-breaking 2021, financial turbulence has become the norm in recent months, and forecasts indicate we can expect more rocky economic conditions ahead.

Whether or not we are in a recession has become a hotly debated topic. The GDP posted annualized declines in both the first and second quarters of 2022, fulfilling a common, informal definition of a recession. Notable industry voices, including National Association of Home Builders Chief Economist Robert Dietz, have said they believe that we have already tipped into a recession, with 76% of adult Americans delaying major purchases in preparation for a downturn.

Persistently high levels of inflation and the Federal Reserve’s aggressive monetary policy continue sending shock waves through the economy. According to the U.S. Bureau of Labor Statistics (BLS) Consumer Price Index , prices of goods and services increased 8.2% from one year ago through September 2022. In response, the Federal Open Markets Committee raised its benchmark rate by another 75 bps at its September meeting. After beginning the year at near-zero short-term interest rates, the FOMC hiked interest rates six times, including a 75 bps increase on November 2.

The multifamily sector and small asset sub-sector continue to benefit from a unique set of circumstances. While multifamily assets are not “recession-proof,” they are downturn resilient. Positive performance trends this year against the backdrop of economic headwinds and stock market declines demonstrate the sector’s durability.

Even as rent growth decelerates, year-over-year gains still outpace inflation. The sector’s unique ability to absorb inflationary pressures is a powerful differentiator that continues to attract new buyer demand. Liquidity is another factor that has enabled the small multifamily sub-sector to maintain its resiliency. Small multifamily loans for market-rate properties often qualify for Fannie Mae and Freddie Mac’s mission-lending mandates, making small multifamily an attractive niche.

There are some signs of an apparent market shift in recent months, especially with respect to tightening credit underwriting standards.

However, the structural undersupply of quality affordable housing options will continue to support rental demand as credit availability remains buttressed by the Agencies. On balance, the small multifamily sub-sector remains in a favorable position to withstand macroeconomic instability.

Lending Volume

The year-end 2021 estimate of new multifamily lending volume for loans with original balances between $1 million and $7.5 million^[1] — including loans for apartment building sales and refinancing — surged to $94.1 billion (Chart 1). The record total represented both a wave of pent-up investment demand that sat on the sidelines during the pandemic uncertainty of 2020 and the anticipation of monetary tightening. 2021’s originations total represented an annual increase of $35.6 billion (up 63.3%) from the year prior.

Through 2022’s three-quarters mark, small multifamily originations were on pace to reach $85.1 billion, sliding down from last year’s record highs. The current year-end estimate would represent a 9.6% decrease from 2021’s total. The small multifamily estimate directionally aligns with the Mortgage Bankers Association’s 2022 multifamily lending forecast, which predicts a 6.6% drop-off in total multifamily lending this year.

Even with small multifamily originations on pace to decline slightly in 2022, the current estimate remains elevated in the context of recent history. Compared to the last year before the pandemic (2019), 2022’s volume is on pace to land 43.8% higher.

Refinancing activity is one significant factor elevating small multifamily originations. Loans originated for the purpose of refinancing accounted for 75.1% of small multifamily lending activity in the third quarter of 2022 — the highest share since the end of 2020 (Chart 2). This uptick in refinancings comes at a time when financing costs have increased. However, for smaller, non-institutional investors, accrued equity in existing investments is often used as a critical source of capital for their next deal. According to WMRE’s investor sentiment survey, a plurality of multifamily investors are in buying mode, with 40.3% still looking for new opportunities this year.

Arbor Small Multifamily Price Index

As measured by the Arbor Small Multifamily Price Index^[2], small multifamily asset valuations surged in the third quarter of 2022, rising 3.6% quarter-over-quarter and 14.0% year-over-year (Chart 3 and Chart 4). These data directionally align with Freddie Mac’s Apartment Investment Market Index, which similarly shows robust levels of sector-level valuation growth. Multifamily properties, which have an average lease of one year, have demonstrated an ability to capture inflationary pressures through cash flows and valuations. Further, in the small multifamily sub-sector, Agency participation has safeguarded liquidity. Together, these factors have led to an extraordinary period of asset price growth.

Cap Rates & Spreads

National average cap rates for small multifamily properties nudged down to another new all-time low of 5.0% in the third quarter of 2022, even as interest rates have climbed (Chart 5). In total, small multifamily cap rates fell by just a single basis point, effectively remaining unchanged from the prior quarter. This stability is noteworthy as market yields have risen broadly across the economy.

The small multifamily risk premium, measured by comparing cap rates to the yield on the 10-Year Treasury, fell again in the third quarter of 2022, dropping from 209 bps to 191 bps. This was the lowest level since the fourth quarter of 2007 (Chart 6).

The compressing spread comes as cap rates have remained anchored at their lows while monetary tightening policy and persistent inflation have pushed Treasury yields to their highest levels in more than a decade. The cap rate spread between small multifamily assets and the rest of the multifamily sector, a measure of the risk unique to smaller properties, decreased slightly by 10 bps during the third quarter of 2022, settling at 36 bps (Chart 7).

Expense Ratios

Expense ratios, measured as the relationship between underwritten property-level expenses and effective gross income, have been sitting higher over the past two years than they had in the two years prior. In 2019 and 2020, expense ratios averaged 40.6% while sitting in a narrow range between 39.8% and 41.4% (Chart 8). Since the start of 2021, expense ratios have averaged 42.4% and have reached as high as 43.5%. A National Apartment Association analysis of 2021 data found that rising property taxes and insurance premiums, and rising utilities, were the main culprits for sustained higher operating expenses.

Leverage & Debt Yields

While cap rate trends suggest that investors participating in the equity side of the capital stack are remaining aggressive, measures of risk-taking on the debt side are turning conservative. Loan-to-value ratios (LTVs) marched higher and higher during the 2010s, hitting an all-time high of 70.5% in March 2020. LTVs then fell sharply to 65.8% by the end of 2020. While LTVs ticked up marginally in 2021, they slid again in 2022. In the third quarter, LTVs fell by a sizable 123 bps to 65.5% — their lowest point on record since 2014 (Chart 9).

Debt yields for small multifamily loans rose by 11 bps to 7.8% in the quarter (Chart 10). The most recent reading marked the third time in the past four years that debt yields have risen. The inverse of debt yields, the debt per dollar of NOI, fell for small multifamily loans. Small multifamily borrowers secured an average of $12.88 in new debt for every $1 of property NOI, down $0.18 from the previous quarter.

Together, these LTV and debt yield trends indicate a tightening of underwriting standards amid increasing economic uncertainty. While risk pricing by borrowers has stayed steady this year, lenders are working in larger equity and property-income cushions to protect against distress.

Outlook

The small multifamily sector remained resilient during the third quarter of 2022, despite challenges in the broader macroeconomic environment.

With small multifamily risk premiums falling to their lowest levels since 2007 amid ascending Treasury rates, it is increasingly likely that some upward cap rate pressure can be expected — a forecast supported by First American’s potential cap rate model.

Still, underlying rental demand is expected to remain strong over the short term. Declining credit availability and higher financing costs are likely to keep many would-be buyers in the rental market. While the small multifamily sub-sector is not immune from economic disruption, it appears to be well-insulated to handle the weight of current and expected business cycle headwinds.

For more small multifamily research and insights, visit arbor.com/articles

¹ All data, unless otherwise stated, are based on Chandan Economics’ analysis of a limited pool of loans with original balances of $1 million to $7.5 million and loan-to-value ratios above 50%.

Small Multifamily Investment Trends Report Q2 2022

Cap Rates Compress as Buyers Seek Inflation Protection via Multifamily Assets

Key Findings

Small multifamily originations are on pace to hit $91.1 billion in 2022, just shy of 2021’s record high.
Cap rates reached a new record low in the second quarter, declining to 5.0%.
Amid surging rents and property-level incomes, expense ratios have returned to pre-pandemic levels.

Table of Contents

State of the Market
Lending Volume
Arbor Small Multifamily Price Index
Cap Rates & Spreads
Expense Ratios
Leverage & Debt Yields
Outlook

State of the Market

Storm clouds continue to gather for the U.S. economy and advanced economies around the world. After the U.S. gross domestic product shrank at a 1.6% seasonally adjusted annualized rate in the first quarter of 2022 and current forecasts anticipate another contraction in the second quarter, talks of an impending recession are omnipresent.

Headlining the list of concerns impacting the U.S. economy is inflation. According to the U.S. Bureau of Labor Statistics (BLS) Consumer Price Index, prices of goods and services increased 9.1% from one year ago through June — the highest mark since 1981. As a result, the financial markets are betting that the Federal Reserve will need to keep its foot on the gas at upcoming policy meetings, raising the cost of capital via hiking its Federal Funds rate.

While the macroeconomic landscape has caused stock market investment returns to sink negative thus far in 2022, multifamily real estate has maintained its resiliency. As has historically been the case, during periods of rising interest rates, would-be homeowners tend to re-engage with the rental market as mortgage costs rise, placing upward pressure on rental housing demand.

The multifamily sector and small asset sub-sector continue to benefit from a unique set of circumstances. Residential commercial real estate continues to attract new buyer demand as investors seek assets that can quickly absorb inflationary pressures. Small multifamily prices continued to press higher at a double-digit annual rate in the second quarter of 2022 and cap rates sank to new all-time lows. According to First American, cap rates may be poised to shift higher in the coming months, particularly if benchmark interest rates and property-level incomes keep ascending. All else equal, small multifamily remains to be a sector buttressed by a favorable balance of tenant and investor demand, a sign of stability during a period of heightened business cycle volatility.

Lending Volume

The year-end 2021 estimate of new multifamily lending volume on loans with original balances between $1 million and $7.5 million^[1] — including loans for apartment building sales and refinancing — surged to $94.1 billion (Chart 1). The record total represented both a wave of pent-up investment demand that sat on the sidelines during the pandemic uncertainty of 2020 and the anticipation of monetary tightening. 2021’s originations total represented an annual increase of $35.6 billion (up 63.3%) from the year prior.

Through 2022’s halfway mark, small multifamily originations are on pace to reach $91.1 billion. While 2022’s year-to-date pace would reflect a slight 3.3% annual decline, the fact that origination totals remain in the same stratosphere as the 2021 record is noteworthy.

A key factor that led to an unprecedented surge in origination volume last year was a wave of refinancing activity ahead of the Federal Reserve initiating its interest rate hikes. However, even as interest rates rose off of their record lows, refinancing activity did not appreciably fall. In the second quarter of 2022, the refinancing share of small multifamily originations jumped up by 488 bps to land at 67.0% — the highest share since the third quarter of 2021 (Chart 2). Beyond stability in refinancing, a growing investor appetite for multifamily properties in a high inflation environment is the other causal factor keeping originations near record levels.

Arbor Small Multifamily Price Index

As measured by the Arbor Small Multifamily Price Index^[2], small multifamily asset valuations continued to grow at a robust rate in the second quarter of 2022, notching quarterly and annual gains of 2.6% and 12.1%, respectively (Chart 3 and Chart 4). Compared to the pandemic low point (in the second quarter of 2020) asset valuations are up by 26.0%. Moreover, valuations are up by 21.6% over where they were before the start of the pandemic.

Cap Rates & Spreads

National average cap rates for small multifamily properties declined to a new all-time low in the second quarter of 2022, dropping 12 bps to land at 5.0% (Chart 5). Small multifamily cap rates had held near 5.2% for four consecutive quarters before the second quarter’s compression.

The small multifamily risk premium — a measure of additional compensation that investors require to account for higher levels of risk — is best measured by comparing cap rates to the yield on the 10-Year Treasury. The average small multifamily risk premium cratered in the second quarter of 2022, falling from 320 bps to 210 bps — its lowest level since 2008. (Chart 6). The narrowing spread comes as cap rates have fallen and Treasury yields have soared by nearly a full percentage point amid monetary tightening and increasing inflation. The cap rate spread between small multifamily assets and the rest of the multifamily sector — a measure of the risk unique to smaller properties — increased slightly by 7 bps during the second quarter of 2022, settling at 46 bps (Chart 7).

Expense Ratios

Expense ratios, measured as the relationship between underwritten property-level expenses to effective gross income, surged for small multifamily properties in 2021 — averaging 42.6% for the year, up from 40.7% and 40.4% in 2019 and 2020, respectively (Chart 8). Growing expense ratios last year were likely due to several factors, including abrupt increases in operating costs and higher than average collection losses. An analysis by the National Apartment Association pegs rising insurance premiums and an increase in ‘wear-and-tear’ from tenants who spent more time in their homes as two of the main reasons for the increase.

Further, according to a Chandan Economics analysis of RentRedi data, on-time rental payments were still in recovery in 2021, averaging 78.9% for the year — 228 bps lower than the 2022 average through June (81.2%). Small multifamily expense ratios came back in line with pre-pandemic levels, declining 183 bps between the first and second quarter, landing at 41.1%. The improvement comes as rent collections have normalized and operators have had a longer period to reset rents in an extended high inflation environment. According to Freddie Mac, multifamily net operating incomes grew by nearly 20% in the 12 months ending in June 2022. Moreover, Yardi Matrix reports that multifamily rents were up an average of 13.7% year-over-year in June — exceeding the uncomfortably high 9.1% inflation rate over the same period.

Leverage & Debt Yields

During the first year of the pandemic, loan-to-value ratios (LTVs) on newly originated small multifamily loans cratered — declining from 70.5% in the first quarter of 2020 to a low of 66.0% by the end of the year. While LTVs have recovered slightly from their 2020 depths, momentum has been uneven. LTVs reached a recent high of 67.9% in the first quarter of 2022 but then proceeded to decline 94 bps in the second quarter, landing at 67.0% (Chart 9). With market pricing of multifamily assets rising at a rapid pace in early 2022, the fact that LTVs failed to climb back to near pre-pandemic levels is a sign of disciplined lender underwriting in the face of growing macroeconomic uncertainty.

Debt yields for small multifamily loans fell by 19 bps to 7.7% in the second quarter of 2022 — just 7 bps above its all-time low (Chart 10). The inverse of debt yields (the debt per dollar of NOI) rose for small multifamily loans in the second quarter. Small multifamily borrowers secured an average of $13.06 in new debt for every $1 of property NOI, up 32 cents from the previous quarter.

Outlook

The small multifamily sector maintained its stability through 2022’s first half, even as the broader macroeconomic environment has become less predictable. With small multifamily risk premiums falling to their lowest levels since 2008 amid ascending Treasury rates, it is increasingly likely that there will be some upward cap rate pressure. However, even if asset price growth cools in the months ahead, underlying valuations are on a strong footing as broader housing market fundamentals should elevate rental demand over the short term. Single-family mortgage credit availability tightened in each month during the second quarter as borrowing costs rose higher — both factors should increase the number of households interested in multifamily housing. On balance, while the small multifamily sub-sector is not immune from disruption, it is favorably insulated to rise above the current set of business cycle headwinds.

For more small multifamily research and insights, visit arbor.com/articles

¹ All data, unless otherwise stated, are based on Chandan Economics’ analysis of a limited pool of loans with original balances of $1 million to $7.5 million and loan-to-value ratios above 50%.

Disclaimer All content is provided herein “as is” and neither Arbor Realty Trust, Inc. or Chandan Economics, LLC (“the Companies”) nor their affiliated or related entities, nor any person involved in the creation, production and distribution of the content make any warranties, express or implied. The Companies do not make any representations regarding the reliability, usefulness, completeness, accuracy, currency nor represent that use of any information provided herein would not infringe on other third party rights. The Companies shall not be liable for any direct, indirect or consequential damages to the reader or a third party arising from the use of the information contained herein.

Small Multifamily Investment Trends Report Q1 2022

Cap rates hold steady as valuations accelerate into Spring 2022

Key Findings

Small multifamily originations are on pace to hit $64.4 billion in 2022, declining from a record-setting 2021 yet remaining elevated.
Asset valuations rose 14.5% year-over-year, the fastest rate since 2004.
Cap rates held steady near 5.2% for the fourth consecutive quarter.

Table of Contents

State of the Market
Lending Volume
Arbor Small Multifamily Price Index
Cap Rates & Spreads
Expense Ratios
Leverage & Debt Yields
Outlook

State of the Market

The economy shrank at a 1.4% seasonally adjusted annualized rate in the first quarter of 2022, according to the U.S. Bureau of Economic Analysis. The contraction comes amid elevated energy costs and growing recessionary concerns. Even so, the level of panic after the first-quarter release remains low as personal consumption expenditures (+2.7%) and private investment spending (+2.3%) — the demand driving pillars of the economy — maintained encouraging levels of growth.

Inflation remains a significant concern. According to the U.S. Bureau of Labor Statistics (BLS) Consumer Price Index, prices of goods and services increased 8.6% from one year ago through March — the highest mark since 1982. In response, the Federal Reserve has initiated its much-anticipated monetary policy tightening cycle. At its March 2022 policy meeting, the central bank raised its short-term policy rate by 25 basis points (bps). According to the CME Group’s FedWatch tool, markets are betting on the Fed raising interest rates at each of its meetings this year, with most participants believing that the federal funds rate will be at or above 2.5% entering 2023.¹

Expectations of higher short-term rates coming soon are influencing long-term interest rates. According to Freddie Mac’s Primary Mortgage Survey^®, 30-year fixed-rate mortgages recently eclipsed 5% for the first time since 2011. Additionally, the yield on 10-Year Treasuries, a closely watched metric that influences real estate financing and cap rates, are also rising, hitting 2.85% on April 18^th — its highest level since 2018.

In the medium term, rising interest rates may limit how much further multifamily cap rates can compress, though current market conditions should insulate the sector from upward cap rate pressure over the short term. However, some market participants still see room for further cap rate compression. According to First American’s Potential Cap Rate Model, trading multifamily cap rates are 0.7% higher than their model suggests they should be.

Within the small multifamily sub-sector, resiliency during the pandemic and robust growth over the past year has fueled optimism and buyer demand for small multifamily assets. According to a recent analysis by Chandan Economics and RentRedi, on-time rental payments in small multifamily units averaged 81.1% in the first quarter of 2022 — the highest sustained level since before the pandemic. Asset valuations are reaping the benefits of higher property-level cashflows, achieved through rising rents. In the first quarter of 2022, annual small multifamily price growth reached its highest level in nearly two decades. Although macroeconomic risks remain, confidence amongst equity buyers and debt lenders continues to support healthy levels of liquidity as we enter Spring 2022.

Lending Volume

The year-end 2021 estimate of new multifamily lending volume on loans with original balances between $1 million and $7.5 million² — including loans for apartment building sales and refinancing — surged to $94.1 billion (Chart 1). The estimate is a substantial increase from previous 2021 estimates, reflecting a sizable increase in originations near the end of the year. The 2021 originations total represents an annual increase of $35.6 billion (up 63.3%) from the year prior. Through the first quarter of 2022, small multifamily originations are on pace to reach $64.4 billion this year — a decline from last year’s record high but a total that would still represent the second-most active year on record. The current annualized originations estimate for 2022 would represent a 31.6% annual decline, though it would remain 8.8% above the pre-pandemic high of $59.2 billion set in 2019.

Three primary factors led to 2021 becoming the most active year for small multifamily originations on record. The first was the return of arms-length buyers as confidence in the macroeconomic recovery strengthened. The second was an influx of new multifamily investors drawn to the asset class because of its strong performance track record and attractiveness as an all-weather investment. Lastly, there was growing anticipation that the Federal Reserve would begin raising interest rates in early 2022, creating a sense of urgency for existing borrowers to secure financing – either for refinancing their mortgages or acquisitions.

With multifamily transaction activity surging through the end of last year and interest rates on the rise, the balance of small multifamily originations used for the purpose of refinancing versus acquisitions has come back in line with pre-pandemic levels. The refinancing share of small multifamily lending fell to 62.1% in the first quarter of 2022 — its lowest level since the third quarter of 2019 (Chart 2). The refinancing share of originations grew considerably through 2020, reaching a high of 79.7% of new small multifamily debt as lenders kept up production while pandemic-triggered uncertainty limited transactions between buyers and sellers.

Arbor Small Multifamily Price Index

As measured by the Arbor Small Multifamily Price Index³, small multifamily asset valuations continued to accelerate in the first quarter of 2022, notching robust quarterly and annual gains of 5.6% and 14.5%, respectively (Chart 3 and Chart 4). On an annual basis, the first-quarter rise in small multifamily asset values marks the most significant jump since 2004. Compared to the pandemic low point reached in the second quarter of 2020, asset valuations are up by 24.5%. Moreover, valuations are up by 19.8% over where they were at the onset of the pandemic.

Cap Rates & Spreads

National average cap rates for small multifamily properties were flat in the first quarter of 2022, declining 7 bps and remaining at a rounded 5.2% (Chart 5). While small multifamily cap rates compressed considerably during the last real estate cycle, movements over the past two years have been marginal. Since the second quarter of 2020, small multifamily cap rates have sat in a narrow range between 515 bps and 533 bps.

After reaching as high as 464 bps in the second quarter of 2020, risk premiums have normalized, declining in six of the past seven quarters. In 2019, small multifamily risk premiums ranged from 318 bps to 405 bps, indicating that current levels are in-line with pre-pandemic risk assessments.

The cap rate spread between small multifamily assets and the rest of the multifamily sector, a measure of the risk unique to smaller properties, declined by 6 bps, settling at 38 bps (Chart 7).

Expense Ratios

Expense ratios, measured as the relationship between underwritten property-level expenses to effective gross income, surged for small multifamily properties in 2021 — averaging 42.6% for the year and hitting a quarterly high of 43.5% in the fourth quarter (Chart 8). Rising expense ratios may signal that apartment operators have not been able to boost rents enough to offset rising expenses. According to an analysis by the National Apartment Association, renter delinquencies and rising operating expenses, namely insurance premiums, have squeezed net returns during the pandemic.

Moreover, a pandemic-era dip in rent collections has also impacted property-level cash flows. However, according to a Chandan Economics analysis of RentRedi data, on-time payments in small multifamily properties have recovered to their pre-pandemic levels. While expense ratios remained elevated at 43.0% through the first quarter of 2022, they are down by 59 bps from the previous quarter. Further, according to an analysis by CoreLogic, rent growth historically has lagged inflation — suggesting that rent growth should continue through 2022. As long as rent growth holds strong this year, there is a mechanism for expense ratios to fall back in-line with pre-pandemic levels.

Leverage & Debt Yields

During the first year of the pandemic, loan-to-value ratios (LTVs) on newly originated small multifamily loans cratered— declining from 70.5% in first-quarter 2020 to a low of 66.0% by the fourth quarter of 2020. However, after leveling out in early 2021, small multifamily LTVs have started to make progress towards recovery. Through the first quarter of 2022, small multifamily LTVs averaged 67.8% — its highest level since the second quarter of 2020.

Debt yields for small multifamily loans fell by 10 bps to 7.9% in the first quarter of 2022 — just 26 bps above its all-time low (Chart 10). The inverse of debt yields, the debt per dollar of NOI, rose for small multifamily loans in the first quarter. Small multifamily borrowers secured an average of $12.75 in new debt for every $1 of property NOI, up 15 cents from the previous quarter.

Outlook

The small multifamily sector has strengthened over the past 12 months, placing it on solid footing as the Federal Reserve begins removing monetary accommodation. The sector finds itself well-positioned to face risks if they materialize in the months ahead. Until proven otherwise, inflation remains a front-of-mind consideration. However, like the rest of the sector, small multifamily assets have a demonstrated ability to recapture inflation into property cashflows. With single-family mortgage credit availability tightening in recent months and borrowing costs rising, the durability of renter demand for small multifamily properties has been reinforced. The small asset subsector maintains many strong tailwinds heading into the middle months of 2022, even as the macroeconomic outlook is mixed.

For more small multifamily research and insights, visit arbor.com/articles

Disclaimer All content is provided herein “as is” and neither Arbor Realty Trust, Inc. or Chandan Economics, LLC (“the Companies”) nor their affiliated or related entities, nor any person involved in the creation, production and distribution of the content make any warranties, express or implied. The Companies do not make any representations regarding the reliability, usefulness, completeness, accuracy, currency nor represent that use of any information provided herein would not infringe on other third party rights. The Companies shall not be liable for any direct, indirect or consequential damages to the reader or a third party arising from the use of the information contained herein.

¹ Data retrieved on April 20th, 2022

² All data, unless otherwise stated, are based on Chandan Economics’ analysis of a limited pool of loans with original balances of $1 million to $7.5 million and loan-to-value ratios above 50%.

³ The Arbor Small Multifamily Price Index (ASMPI) uses model estimates of small multifamily rents and compares them against small multifamily cap rates. The index measures the estimated average price appreciation on small multifamily properties with 5 to 50 units and primary mortgages of $1 million to $7.5 million. For the full methodology, visit arbor.com/asmpi-faq.

Small Multifamily Investment Trends Report Q4 2021

Q4 2021
Small Multifamily
Investment Trends Report

Acquisitions, Refinancing Activity both Surge, Sending Small Multifamily Originations Soaring

Key Findings

Small multifamily originations jump by 48.1% in 2021, reaching $85.4 billion.
The refinancing share of originations has settled back near a normal, pre-pandemic range.
Asset prices rose a robust 9.7% from a year earlier.

Table of Contents

State of the Market

Lending Volume

Arbor Small Multifamily Price Index

Cap Rates & Spreads

Expense Ratios

Leverage & Debt Yields

Outlook

State of the Market

The U.S. economy grew by 5.7% in 2021, reaching $19.4 trillion (measured in inflation-adjusted, 2012 dollars), according to the Bureau of Economic Analysis. Considering the ongoing pandemic, the annual growth figure is a testament to the resiliency of the U.S. economy and strength of the current recovery.

Supply chain disruptions, labor shortages, and a shift to more goods consumption (as opposed to services) have all collectively stoked inflationary pressures. According to the Bureau of Labor Statistics (BLS) Consumer Price Index, prices of goods and services increased 7.0% from one year ago through December — the highest mark since 1982. In response, the Federal Reserve is prepping for a monetary policy tightening cycle. As of the latest Summary of Economic Projections, the policy-setting body of the Fed currently forecasts hiking interest rates three times in 2022 and three times again in 2023.

Annual lease structures within the multifamily sector are proving a valuable feature in a high inflation setting. According to Real Page, new lease rent growth reached 13.9% in November 2021 — a record-setting pace. Beyond inflation, data from the Mortgage Bankers Association indicates that mortgage credit availability remains significantly below pre-pandemic levels, supportive of rental housing demand.

Within the small multifamily sub-sector, there is significant recovery optimism, though some pandemic-era concerns remain. According to a recent analysis by Chandan Economics and RentRedi, independent landlords operating small multifamily properties continue to see lower full- and on-time collection rates compared to a pre-pandemic benchmark. With operating expenses rising with inflation and collection rates remaining below normal levels, small multifamily expense ratios have risen through 2021. Still, as this report will detail, small multifamily cap rates remain stable near their all-time lows, and loan-to-value ratios have started to recover. Moreover, a frenzied return of buyers and a wave of borrowers seeking to refinance ahead of the Fed’s monetary tightening are leading to record levels of origination and transaction activity. All else equal, while risks remain, demand stability and growing liquidity for small multifamily assets are broadly supportive of the sector heading into 2022.

Lending Volume

The initial year-end 2021 estimate of new multifamily lending volume on loans with original balances between $1 million and $7.5 million1 — including loans for apartment building sales and refinancing — surged to $85.4 billion (Chart 1). The estimate is a substantial step-up from previous 2021 annualized estimates, reflecting a sizable increase in originations at the end of the third quarter through the end of the year. The current estimate would represent an annual increase of $27.7 billion from last year’s total, or a 48.1% growth rate— the highest annual growth rate since 2012. Moreover, the 2021 originations estimate blows past the previous high of $59.2 billion set in 2019. Behind the dramatic surge in small multifamily lending volume are two interrelated trends. Confidence in the multifamily sector’s growth and the protection that tangible assets offer against inflation risk contributed to a wave of transaction activity through the end of the year. At the same time, with a Federal Reserve preparing for monetary tightening in 2022, borrowers are increasingly refinancing to lock into low-interest rates.

The balance of small multifamily originations for the purpose of refinancing versus acquisitions has come back in line with pre-pandemic levels. The refinancing share of small multifamily lending fell to 65.9% in the fourth quarter of 2021, declining from 70.3% in the previous quarter (Chart 2). The refinancing share of originations grew considerably through 2020, reaching a high of 79.7% of new small multifamily debt as lenders kept up production while pandemic-triggered uncertainty limited “arm’s length” transactions between buyers and sellers.

Arbor Small Multifamily Price Index

As measured by the Arbor Small Multifamily Price Index2, small multifamily asset valuations accelerated in the final quarter of 2021, notching robust quarterly and annual gains of 6.3% and 9.7%, respectively (Chart 3 and Chart 4). On an annual change basis, the fourth quarter rise in small multifamily asset values marks the largest jump since 2011. Compared to the crisis-low point reached in the second quarter of 2020, asset valuations are up by a significant 18.4%. Moreover, valuations are up by 13.8% over where they were at the onset of the pandemic.

Cap Rates & Spreads

National average cap rates for small multifamily properties were effectively flat in the fourth quarter of 2021, rising 1 basis point (bps) and remaining at a rounded 5.2% (Chart 5). While cap rate movements over the past half-year have been marginal, the fourth quarter reading marks the first time that small multifamily cap rates have risen in consecutive quarters since 2017. Small multifamily cap rates compressed considerably during the last real estate cycle, declining from a cyclical high of 7.6% in 2010 to their current range near 5.2%. Since the second quarter of 2020, small multifamily cap rates have sat in a narrow range between 518 bps and 534 bps.

The small multifamily risk premium, a measure of additional compensation that investors require to account for higher levels of risk, is best measured by comparing cap rates to 10-year Treasury yields. The credit quality of the U.S. government is perceived as unmatched, making the price it pays for its debt an approximation for the risk-free interest rate. The small multifamily risk premium averaged 368 bps in the fourth quarter of 2021, down from 388 bps the previous quarter (Chart 6). After reaching as high as 466 bps in the second quarter of 2020, risk premiums have normalized, declining in five of the past six quarters. In 2019, small multifamily risk premiums ranged from 318 bps to 405 bps, indicating that current levels are in-line with pre-pandemic assessments of risk. The cap rate spread between small multifamily assets and the rest of the multifamily sector, a measure of the risk that is unique to smaller properties, rose by 26 bps in the fourth quarter of 2021, settling at 42 bps— the largest spread since the first quarter of 2021 (Chart 7).

Expense Ratios

Expense Ratios, measured here as the relationship between underwritten property-level expenses to effective gross income, have risen for small multifamily properties over the past year— a sign that operators have not been able to boost rents enough to offset rising expenses. Moreover, a dip in rent collections is also impacting property-level cashflows. On-time rent payment rates in independently operated small multifamily properties were down by 6.0% from their pre-pandemic benchmark through December 2021. In 2019, before the pandemic, small multifamily expense ratios sat in a narrow range between 40.5% and 41.1% (Chart 8). Through the fourth quarter of 2021, expense ratios have grown to 43.6%. According to an analysis by the National Apartment Association, renter delinquencies and rising operating expenses, namely insurance premiums, have squeezed net returns during the pandemic.

Leverage & Debt Yields

The general trend for loan-to-value ratios (LTVs) on newly originated small multifamily loans was that of declines throughout most of the past two years. Prior to the fourth quarter of 2021, LTVs fell in five of the past seven quarters. For reference, small multifamily LTVs fell on a quarter-over-quarter basis only five times in the entire decade leading up to the pandemic. In the fourth quarter of 2021, small multifamily LTVs showed signs of recovery, jumping 146 bps to 67.8%. Still, compared to the high watermark of 70.6% reached in the fourth quarter of 2021, LTVs remain down by 285 bps (Chart 9).

Debt yields for small multifamily loans fell by 20 bps to 7.8% in the fourth quarter of 2021— just 19 bps above its all-time low (Chart 10). Debt per dollar of NOI, the inverse of debt yields, rose for small multifamily loans in the fourth quarter. Small multifamily borrowers were securing an average of $12.85 in new debt for every $1 of property NOI, up 32 cents from the previous quarter.

Outlook

Small multifamily remains well-positioned to for 2022. With inflation reaching its highest levels in a generation and higher interest rates on the horizon, a higher expense environment over the short-term is probable for many properties. The success of small multifamily operators will rest on their ability to match rising costs with rising rental revenues. Nevertheless, with standard apartment leases lasting only for an average of one year, cashflows can more quickly adjust to inflationary pressures than other commercial real estate sectors, making the asset class more attractive in the current environment. Resurgent levels of multifamily transaction activity and the abundant presence of buyers offers significant insulation to downside pressures potentially posed by the pandemic and expectations for monetary tightening. Moreover, despite rising levels of residential construction, the U.S. housing shortage is present. With the small multifamily sector acting as a critical source of the nation’s affordable housing stock for renters by necessity, the demand for these properties remains strong.

For more small multifamily research and insights, visit arbor.com/articles

Disclaimer All content is provided herein “as is” and neither Arbor Realty Trust, Inc. or Chandan Economics, LLC (“the Companies”) nor their affiliated or related entities, nor any person involved in the creation, production and distribution of the content make any warranties, express or implied. The Companies do not make any representations regarding the reliability, usefulness, completeness, accuracy, currency nor represent that use of any information provided herein would not infringe on other third party rights. The Companies shall not be liable for any direct, indirect or consequential damages to the reader or a third party arising from the use of the information contained herein.

Cash Flows Remain Resilient as Valuations and Cap Rates Feel Interest Rate Pressure

Key Findings

State of the Market

Lending Volume

Arbor Small Multifamily Price Index

Cap Rates & Spreads

Expense Ratios

Rent Collections

Leverage & Debt Yields

Outlook

Valuations Flatten as Cap Rates Start to Rise from Record Lows

Key Findings

State of the Market

Lending Volume

Arbor Small Multifamily Price Index

Cap Rates & Spreads

Expense Ratios

Rent Collections

Leverage & Debt Yields

Outlook

Liquidity and Inflation Protection Continue to Attract Investors Even as Underwriting Standards Tighten

Key Findings

State of the Market

Lending Volume

Arbor Small Multifamily Price Index

Cap Rates & Spreads

Expense Ratios

Leverage & Debt Yields

Outlook

Cap Rates Compress as Buyers Seek Inflation Protection via Multifamily Assets

Key Findings

State of the Market

Lending Volume

Arbor Small Multifamily Price Index

Cap Rates & Spreads

Expense Ratios

Leverage & Debt Yields

Outlook

Cap rates hold steady as valuations accelerate into Spring 2022

Key Findings

State of the Market

Lending Volume

Arbor Small Multifamily Price Index

Cap Rates & Spreads

Expense Ratios

Leverage & Debt Yields

Outlook

Q4 2021 Small Multifamily Investment Trends Report

Acquisitions, Refinancing Activity both Surge, Sending Small Multifamily Originations Soaring

State of the Market

Lending Volume

Arbor Small Multifamily Price Index

Cap Rates & Spreads

Expense Ratios

Leverage & Debt Yields

Outlook

Cash Flows Remain Resilient as Valuations and Cap Rates Feel
Interest Rate Pressure

Q4 2021
Small Multifamily
Investment Trends Report