Authored by Jim Driscoll, Senior Vice President, Development and Acquisitions at Blue Onyx
As we close out the first quarter of the new year, the multifamily market appears relatively unchanged for buyers experiencing difficulties around new land and property acquisitions. On the one hand, the looming threat of an economic downturn has led many lenders to be more conservative and raise rates, especially while working through expanded loan books. Adding to the stress of this environment is the recent collapse of two of the largest national banks — Silicon Valley Bank and New York’s Signature Bank, which has heightened stakeholder concerns and made the prospect of capital acquisition even more daunting. A growing number of smaller entities are on extra high alert and can no longer be expected to fill the gaps in commercial real estate lending created by larger institutions’ response to the wider macro-environment over the past year.
Simultaneously, a growing number of sellers are choosing to hold out on deals until 2024, when there may be stronger potential to realize greater land value — presuming the current environment is a short-term occurrence, and the market normalizes over the next three quarters. This slowdown in multifamily transaction volume demonstrates a clear gap in the bid-ask spread, exacerbated by the uncertainty of the cost of debt, high inflation and an almost-guaranteed recession.
Couple this dynamic with the fact that construction costs have outpaced rent growth, and it’s clear that the multifamily market currently sits at an inflection point, ultimately resulting in fewer opportunities present in the broker pipeline. As such, owners and operators who are proceeding with an active acquisition strategy are now reconsidering the context of the market today and adapting their strategy as needed to address the issues at the root of the dearth in multifamily sales.
Returning to a boots-on-the-ground approach
At Blue Onyx, part of what we’re doing is getting innovative without reinventing the wheel — in many cases, we’re reverting back to a more traditional, hands-on approach that includes increased communication with architects, engineers, site planners, and of course, sellers, to best and most accurately determine land value and establish terms of a potential deal.
For developers who may not have the capital or scope of expertise needed to execute on a new project, there has been a spike in the use of co-GP deal structures where joint financial capacity and a more robust development stack can be leveraged to increase both the attractiveness of an offer and buyers’ ability to deliver a strong final product; with this in mind, multifamily players should not underestimate the value of sweat equity in the existing environment.
Looking to urban-adjacent, tertiary markets
Site selection is also a key factor to consider when assessing the acquisition landscape and opportunities. During the pandemic, we witnessed an exodus of renters who chose to escape urban environments, instead looking for the safety and comfort of more suburban and even rural settings. At the same time, a slew of often-younger, out-of-town renters made their way into the city limits, taking advantage of pandemic-era rent pricing to snag formerly unattainable spaces.
Now, as a sense of normalcy returns, renters from each of these sects are reassessing and evaluating their next move — particularly as the national housing affordability crisis remains prominent and plays a major role in many renters’ decision-making process. Those who had fled the city are now considering a move closer back to their urban roots, especially amidst the rising popularity of hybrid work structures, while the newcomers are now seeking rental options that still offer highly sought-after urban access, but without the staggering price tags that have returned within the urban core.
These tertiary, urban-adjacent markets are proving significant sources of opportunity for the multifamily sector — a primary example being regions across New Jersey, which continue to rise in prominence. These markets are experiencing growing demand from former city dwellers due to the desirable connectivity and more tempered asking rents offered in emerging communities throughout the state. The same holds true in similar submarkets both in New York north of New York City and on Long Island; while Blue Onyx’s own focus has been more concentrated in Northern New Jersey as of late, we are actively pursuing opportunities and are seeing a growing momentum in these areas as well.
Developing thoughtful local partnerships
In a final attempt to drive acquisition activity forward, owners and operators should establish a thoughtful approach toward working with local municipalities and organizations, as well as a pathway to effectively interact with the communities that will be impacted. By successfully fostering strong local partnerships, buyers are better positioned to work with regional leaders in government and the wider community to execute on land deals, knowing there is alignment in a goal of maximizing land value to uplift the community and drive economic development.
Perhaps most critical is effective communication; if all relevant stakeholders understand the intent behind a project and are made aware of a developer’s thoughtful commitment to bettering the surrounding neighborhood, the acquisition (and ultimate development) process can be made notably more seamless.
Innovation through consideration, not revolution
Overall, when it comes to acquisition activity and evolving strategies in the multifamily sector, players in the industry can advance their position and access to opportunities by simply taking the time to re-evaluate their approach and make some seemingly basic but undeniably meaningful adjustments.
While uncertainty and concerns surrounding the ripple effects of a market downturn circle the market, developers should continue to analyze fundamentals such as site selection choices and stakeholders communications, taking into account the needs of the market and deploying the proper changes to ensure success in the short- and long-term.
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