Our View on Multifamily for 2021
Much of commercial real estate sustained a significant blow during the lockdowns of 2020. The one bright spot has been multifamily apartments. This has especially been the case in states that are more friendly to business and real estate investors. However, the year ahead will have challenges. This is the time to diversify.
Last year as the economy in the US buckled and the stock market crashed, the Fed stepped in bolstering bank reserves. The result saw the 10-year Treasury rate crash from 1.93% at the beginning of 2020 to an August low of .51%. Those of us who invest in commercial multifamily property understand that the debt we use to finance our projects is keyed primarily off the 10-year rate. This low 10-year yield further compressed cap rates (the valuation metric we use to value multifamily properties) and made it difficult to bid on new projects. While lending rates plummeted last year and values spiked, occupancies became a challenge. These factors shifted most property owners and managers into management mode rather than acquisition mode. Steeple Rock closed only 1 multifamily project in 2020 as we focused mostly on tracking with the management of properties we already own.
Looking ahead, we are seeing the 10-year Treasury rise from the ashes. The rate at the time of writing is 1.18% which is favorable for lending on multifamily projects but trending upward. Occupancies are also strengthening. Most of our projects did not experience significant occupancy challenges but did require hard work and creativity on the part of our leasing offices. We just reported on our Jacksonville property that the pre-leased occupancy rate for the next month is 100%. This is a very rare number, but one we'll take as our business plan on this particular project is making strong progress.
As we approach new projects in 2021 we are encouraging caution. Cap rates are compressed making the bidding process difficult. Many syndicators will overpay for multifamily in this climate. Inflation is already being seen in commodity prices and some valuations can be at risk if managers cannot manage rents correctly in this new reality. The best way to invest in multifamily in this climate, we feel, is to do so in a diversified manner.