Slumping apartment rents? This landlord is actually seeing increasing rents — and buying opportunities — amid a construction boom.

“The best markets right now are in the Midwest,” according to Larry Connor, founder of The Connor Group, an Ohio-based private real-estate firm which owns about $4.5 billion worth of luxury apartment properties in 18 U.S. markets.

Certain hot spots such as Austin, Texas, have been vulnerable to overbuilding, which has weighed on rents, whereas supply-demand dynamics in the Midwest have stayed more in balance, Connor said.

To that end, the Connor Group in December purchased its fourth apartment property in the Denver area at almost a 40% discount, paying roughly $100 million for a building that was built only three years ago, Connor told MarketWatch.

While deals like those likely won’t come along everyday, his team is gearing up to snap up luxury apartment buildings in distress in locations it likes over the next 12 to 18 months, as some institutional property owners struggle to refinance old debt in a higher-rate environment.

And Connor says he isn’t yet seeing a lot of competition from potential Wall Street-backed buyers on his turf, even though many firms have dry powder on the sidelines.

The new year is also poised to see the biggest wave of new apartment-building supply in decades, with CBRE expecting up to 440,000 new units to be delivered in 2024 and more than 900,000 currently under construction.

Where rents languish

After a big pandemic boom, multifamily rent growth is expected to remain modestly positive this year, according to Yardi Matrix.

Their data show rents finished 2023 with a 0.3% gain, putting the average U.S. asking rent at $1,709 in December, up from $1,600 two years prior, according to a new Yardi report released Wednesday. 

The Northeast and Midwest regions, however, continue to press higher, with New York City seeing the biggest rent growth of 5.9% from a year earlier. Columbus, Ohio, saw gains of 3.8%, while Chicago’s growth was 3.1%.

On the flip side, Seattle, San Francisco, Austin and a dozen other cities saw annual declines in rent growth in 2023.

“Everybody is talking about pressure on rents, about rents that have gone negative,” Connor noted. “That’s absolutely not the case for us.”

Instead, Connor said his firm’s rents in the past year increased 4% to 8% at properties where renters renewed or signed new leases. “A few years ago, it was 10% to 15%,” he said, adding that the company knew those figures were not sustainable.

While much focus has been on empty office buildings, concerns have also been raised about potential stress in multifamily properties — particularly if the Federal Reserve keeps interest rates elevated, making refinancing old debt difficult amid a backdrop of retreating property values.

In a slight reprieve, the benchmark 10-year Treasury yield,
BX:TMUBMUSD10Y
used to finance much of the economy, has fallen from a nearly 5% peak in October to roughly 4% to start the new year.

But several small-time investors in Sun Belt apartment properties have already collapsed as floating-rate debt has gotten more expensive to maintain, as the Fed began increasing interest rates in 2022 to fight high inflation.

The so-called value-add play, in which apartment buildings have traded at least separate three times between 2013 and 2013, accounts for only about 5% of Yardi’s database, said Paul Fiorilla, director of research at Yardi Matrix, in a phone interview with MarketWatch.

“It’s going to be painful for every property to go from a low interest rate to a high rate,” Fiorilla said. “But I think the distress is going to be focused in the small subset of multifamily that is value-add properties refinanced between 2020 and early 2022 with short-term debt and the intention of flipping them in a couple of years.”

Few deals, big discounts

Rents, as part of the broader U.S. inflation picture, have been a major focus of financial markets, largely because shelter costs have been a trickier part of the inflation equation to tackle.

Inflation data arriving via December’s consumer-price index, due out Thursday, will be closely watched to help inform the Fed’s next steps on interest rates.

In another positive sign for commercial real estate, debt issued by real estate investment trusts (REITs) has now rallied back to levels seen before the collapse of Silicon Valley Bank in March 2023, which sparked concerns about broader stress at regional banks that have been major lenders in the sector, BofA Global strategists said in a Tuesday client note.

Connor still expects more distressed deals to shake out in 2024 — albeit not a flood of them.

In a typical year, his roughly 30-year-old firm acquires about $1 billion to $1.5 billion in luxury apartment properties, but expects a smaller $700 million to $800 million in deals this year.

That’s largely because price decreases for commercial real estate have meant far fewer properties on the market, outside of motivated sellers.

“If you look at values from the peak to current levels, they are generally 20% to 25% lower than what you could have sold a property for in 2021 or the first half of 2022,” Connor said.