🔒Multifamily experts see adversity, selective opportunity in 2024

Connecticut’s population grew by tens of thousands of residents during the COVID-19 pandemic, exacerbating an existing housing shortage and prompting residential property values and rents to soar.

That made multifamily housing an attractive investment vehicle for developers and landlords, with some municipalities — like Hartford and New Haven — eagerly embracing new developments in a bid to boost vitality.

The resulting boom in investment and development slowed as 2023 progressed, hampered by rising interest rates, tighter availability of lending capital and an increasingly shaky economic outlook.

While activity has diminished, multifamily remains one of the hotter real estate investments in Connecticut.

Here are some trends to watch in the multifamily sector in 2024.

Financing woes

High interest rates and lack of bank financing will be the top issues impacting the multifamily market, experts said.

“Interest rates have risen dramatically over the past year, which is making development of multifamily projects increasingly difficult to make the numbers work because, effectively, the rates have doubled,” said Randy Salvatore, CEO of Stamford-based multifamily development firm RMS Cos. “And so, the cost of financing these projects has doubled.”

Some lenders are skittish about new construction because their existing loan portfolios face uncertainty, particularly from office space deals, which is sapping appetite for other types of lending, Salvatore said.

Even multifamily loans are under pressure as some borrowers try to roll over short-term construction loans into higher-interest-rate permanent financing, he said.

This is making it “almost impossible” for borrowers, other than those with strong balance sheets and track records of success, he said.

“A lot of the developments that are planned won’t ever get built unless things change right now, because they just don’t pencil out, or because the developers are having trouble getting financing,” Salvatore said.

Buying and selling

Interest rates are at a 10-year high, but demand for multifamily properties remains high, said Thuyan Tran, of Hartford-based Oxford Realty, one of the busiest multifamily brokers in Greater Hartford.

“Transactions and market activity continued at a slower, but overall good pace throughout 2023, and will continue into 2024, thanks to the general housing shortage,” Tran said.

She predicts rates will likely remain somewhat stable in 2024, which will keep real estate prices steady while cooling inflation.

However, tighter lending standards, including shrinking loan-to-value ratios, have priced many multifamily investors out of the market.

Inflated costs for building upkeep, insurance and management have also taken a bite out of net operating income, she said.

Macroeconomic concerns

Growing economic uncertainty due to macroeconomic factors and international flashpoints, like the ongoing wars in Ukraine and the West Bank, threaten to tip the economic scales into the negative, Salvatore said.

The economy is already slowing, Salvatore said, which will ultimately lead to pressure on renters and their ability to pay higher rates.

“When occupancies go down and vacancies go up, then the properties need to lower rents, which makes it very difficult to be in the multifamily business, because you have very real fixed costs,” Salvatore said.

Keep on swimming

Despite potential headwinds, Salvatore is moving ahead with ambitious projects in Hartford and elsewhere.

RMS is working on three separate projects in Hartford — including near Dunkin’ Park and on the former Rensselaer Polytechnic Institute campus — that will add hundreds of new downtown apartments in the years ahead, with many more in the pipeline.

In Norwalk, RMS will begin the new year with the launch of a roughly $60 million mixed-use development that will include 204 apartments and first-floor retail on a site that formerly hosted a YMCA. In New Haven, RMS is moving to complete a 112-unit apartment building as the last phase of the city’s Downtown Crossing development.

Salvatore said he expects a slowdown in development that will free up labor and reduce building costs.

His company is a long-term owner-investor, so it can be an advantage to build during an economic slowdown, and complete projects as the economy turns for the better, he said.

“I firmly believe that if you can make the economics work in this new interest-rate environment, it’s a great time to develop in markets you believe have good long-term prospects,” Salvatore said.

Check out the rest of HBJ's 2024 economic forecast issue