The Commercial Real Estate Alpha Site

The key word for this article is Normalization.

After a period of declining valuations, small multifamily properties rebounded in late 2024, with increasing loan originations and strong occupancy rates pointing to market stabilization.

Back in the black: Small multifamily valuations saw an upward shift in Q3 and Q4 of 2024, despite a 2.1% year-over-year decline in Q4. The pace of price drops has slowed, with Q4 valuations ticking up 0.7% from the previous quarter. This signals a potential stabilization, driven by strong demand for workforce housing.

More originations: Loan origination volumes rose 5% in 2024, reaching $46.7 billion—just shy of the pre-pandemic average of $50.5 billion (2015-2019). However, rising interest rates have weighed on cash-out refinancing, which declined from 75.6% of total loans in Q3 2022 to 68.4% by the end of 2024.

Cap rates, debt yields: Cap rates for small multifamily properties averaged 6% in Q4, up 40 basis points from the broader multifamily sector. Debt yields have also increased, leading lenders to adopt a more cautious approach with lower loan-to-value ratios.

Better occupancy: Occupancy rates climbed to 97.5% in Q4, reflecting strong absorption of new supply. Additionally, expense ratios improved to 41.0%, down from 42.6% a year earlier, suggesting property-level financials are stabilizing.

➥ THE TAKEAWAY

Looking good: Despite rising interest rates, the small multifamily sector is on a recovery path, buoyed by strong demand for affordable housing and improving lending volumes. If interest rates stabilize, 2025 could bring further normalization.