2024 Forecast: For investors, multifamily real estate market looks to ‘settle’ in coming months

Provided Photo Brit Vitalius, owner of Vitalius Real Estate in Portland, says the combination of higher interest rates and a decline in out-of-state buyers is “settling” the investment market for multifamily housing.

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By Peter Van Allen

While the multifamily housing market continued to be strong in 2023, it was also a year of transitions as different forces pushed and pulled buyers, says a real estate leader who specializes in the sector.

Brit Vitalius, owner of Portland-based Vitalius Real Estate, says a number of dynamics have come into play: tight inventory, higher interest rates, fewer so-called COVID-refugee buyers and, in Portland, rent control restrictions.

“Overall, low inventory seemed to define the market and buoy prices across the board. New multifamily listings in Cumberland County were down 20% from 2022,” Vitalius says.

In Portland, the price of multifamily properties with two to four units are generally held, but with fewer buyers. Such properties are exempt from rent control laws if owner occupied, so the buyers tended to be landlords that would live on premise (as opposed to investors).

Larger multifamily properties, with five units or more, have lost all their “value-add” appeal.

“The rental income was frozen at a single point in time by Portland’s rent control, with only minor increases allowed,” he says. “This has driven many investors out of Portland’s residential investments.”

Investor dollars continued to flow away from Portland toward the Lewiston-Auburn market.

“Prices and activity jumped [in L-A] as buyers came as owner-occupants and investors, and from in state and out of state. Multiple offers were common on many listings. The smaller properties attracted many first time homeowners, including new Mainers,” he says, noting that investors were paying an average of $100,000 per unit for multifamily properties, an increase of $22,000, on average, from a decade earlier.

Fear over higher interest rates had an impact, but the impact wasn’t as dramatic as feared.

“Interest rates cooled buyer demand and sobered pricing, although not as much as the math would seem to demand. That said, we saw deals fall apart because buying power was lost due to higher interest rates,” he says.

Finally, the crazy demand from COVID-refugee buyers seemed to ease last year.

“Few buyers arrived from out-of-state urban areas willing to ‘pay anything’ for their oasis in Maine. It all felt like a bit of a slow return to normal,” Vitalius says.

Outlook

“I expect that 2024 will be another year of transition and settling. Inventory increases may be offset by increased buyer demand if interest rates decline. Personally, I’m wary that there is a piper to pay for 10 years of dramatic price increases fueled by high rents, low interest rates and then COVID relocations,” Vitalius says.

“Today, new inventory is coming online, interest rates have more than doubled, and the COVID pressure is off. I’ve been hearing anecdotal evidence of softening rental demand. If that continues and interest rates remain above 7% to the end of 2024, there is a chance that the market will cool rather quickly.”