I know this isn't a fun topic, but the warning signs that our market is going to continue to cool for the foreseeable future are getting stronger. To be clear, that could be a good thing if you're looking to buy properties soon, it's irrelevant if you own properties you plan on holding onto for a long time but would be bad news if you NEED to sell properties in the near future.
Commercial real estate values are already down 20% or more from the 2021 and 2022 peak, and office is down as much as 50% in some markets. Many assumed that was the bottom.
I’m not so sure about that, in fact as time goes on I’m feeling more and more confident that it’s not.
THE ESCAPE HATCH SLAMMED SHUT
In 2021 and 2022, buyers loaded up on short-term floating rate bridge debt to close big multifamily deals. When the Fed raised short-term rates, their interest costs roughly doubled. The plan was to hang on and refinance into cheap long-term fixed rate debt.
That plan needed long-term rates to come down. They went up. The 10-year Treasury hit 5.2% in late September, the highest since 2007, and sat around 5.1% in mid-October. Commercial loan rates are back around 7.5%.
The Fed doesn’t set the 10-year. It controls overnight borrowing. The bond market sets the 10-year, and it’s being pushed up by sticky inflation and competition for capital, including the flood of high-grade corporate debt funding AI infrastructure. When investors can buy bonds from the biggest companies in the world at a better yield, Treasuries lose buyers, and long-term real estate debt gets more expensive.
THE MATH THAT DOESN’T WORK
You make money in the gap between what a property earns (the cap rate) and what it costs to borrow. When the cap rate is below your interest rate, that’s negative leverage, and every borrowed dollar loses money.
Brokers are still marketing tired Class B buildings at 5% caps with debt at 7% or more. Nobody rational buys that. Sellers want last year’s price, buyers want next year’s, and that gap is where the second wave lives. Cap rates have to rise, and prices have to fall, before deals trade again. If money costs 7%, a healthy deal needs something closer to a 9% cap. Very little stabilized multifamily is priced there.
IT’S NOT JUST RATES
This was a four-way collision. Interest rates, cap rates, rent growth and occupancy all went green in 2021 and all reversed together. Builders delivered a historic wave of apartments in places like Austin and Denver just as population growth slowed and immigration dropped. Those markets now have heavy concessions and new tenants paying less than the ones who moved out.
Southern New Hampshire has the opposite problem: not enough housing and steady migration from Massachusetts. Our fundamentals are healthier, but we’re not immune.
THE RENTER IS STRETCHED
Consumer sentiment just hit 46.3 on the University of Michigan index, near this spring’s all-time low. Yet spending keeps rising.
Older, wealthier households are doing most of it, funded by gains in stocks and home equity. Younger and lower-income households are keeping up with credit cards and shrinking savings. Card balances are at record highs.
That second group is our tenant base. There’s a real ceiling on rents, even in a tight market like ours, so we don’t underwrite big rent bumps and we’d rather keep a good tenant than chase the last $75 and eat a vacancy. And if stocks roll over and the job market softens, the people carrying those card balances feel it first.
WHAT THIS MEANS FOR SMALL MULTIFAMILY
Forced selling will be concentrated in large, syndicated deals with bridge debt. That’s not what trades in the 3 to 20 unit space here. Our sellers are mostly long-term local owners with little or no debt. Rates don’t force them to sell.
Life does. An owner ready to retire. A building that needs a roof, a boiler and six kitchens. Someone who’s self-managed for 25 years and is done. Most of them don’t have to take a bad price, but they’ll take a fair one from a buyer who makes it easy and closes.
THE HONEST CAVEAT
New Hampshire small multifamily may never see a true wave of distress. Supply is tight, demand is solid, and most owners aren’t overleveraged. Prices could stay sticky while the pain plays out elsewhere, and the bottom could drag on for years. Higher rates hurt us too: our refinances cost more, and every deal has to work harder on the renovation side to make up for what cheap money used to cover.