In the multifamily market life cycle


I put up a poll on Linkedin this week, asking this question, “Where are we on the multifamily life cycle right now?”  The choices were:

–          Recovery after a Bottom

–          Expansion up to the Top, Growth

–          Contraction after the Top

–          Bottom

LinkedIn reported there were almost  900 impressions on the post from LinkedIn members in a Multifamily Group.

If you are not familiar with this market cycle concept, here is a graph from Mueller, Real Estate Finance 1995 that shows the graph of a market cycle…

A rising line on the graph would represent times when the prices paid for apartment complexes are rising.  A falling line would represent when the prices paid are falling.  Over time the prices go up and down in what are labeled as market phases.

RECOVERY is Phase 1.  This is after a market Bottom. A bottom happens when the prices have fallen to their lowest level and start rising again.  Recovery usually happens when demand begins to pick up and rents can be raised.

EXPANSION (Phase 2) begins sometime after the Recovery Phase has proven itself, perhaps after  Vacancies are declining.  Demand is outstripping supply.  Rents can be raised during the expansion phase.  Net operating incomes (NOI) are increasing too.   

Expansion continues until the market TOP is reached. A top is when prices are at their highest in any given cycle.

CONTRACTION (Which the graph above calls Hyper-Supply) is Phase 3.  Vacancies begin to increase.  Rents are leveling out.  NOIs have also stabilized or are falling.  Values of properties are decreasing.

BOTTOMING is Phase 4, when the supply is not keeping up with demand again.  Not enough new units are being built and rents level out.



Those who study these things say the BEST TIME to buy properties is somewhere around the market “Bottom”.  Perhaps the best time, if you are a good market timer, is just after the market has bottomed.  This would be when rents are the lowest and property values will also be the lowest.  This is when the sales CAP rates will be the highest.

The most fear for the sellers is during the downward trends, when their vacancies are increasing and their net operating incomes are falling. 

And conversely, the WORST TIME to buy properties is as the line is increasing and almost at the TOP.  If you are a seller, this is when you will likely get the highest price for your property.  If you are buying this is when selling CAP rates will likely be the lowest and you will be paying top dollar for complexes.

The trouble is we don’t know when TOPS and BOTTOMS will actually happen.  The best we can do is take educated guesses based on our understanding of market forces.


Understanding the multifamily market life cycle is crucial to us as wise investors, wouldn’t you agree? 

In our monthly virtual multifamily meetup this past week, Mark Johnston said, “We make our money when we buy.”  As we talked further, we realized this is finding the place in the market cycle when we can pay the least and (if we ever sell) finding the place in the market cycle when our properties have their highest value.

The better educated and more aware we are of the following forces the better we are able to invest wisely.

These are some of the key market-shaping forces…

GLOBAL ECONOMIC FACTORS.  Although all real estate values are local, the larger global factors do have a big influence on the value of our multifamily assets.  Geopolitical events like COVID-19, war, trade disputes, and currency devaluations can affect the flow of capital and the cost of goods.

GOVERNMENT POLICIES.  Taxes, zoning regulations, housing affordability initiatives and Federal Reserve policies will influence real estate market dynamics.  Mortgage regulations and housing subsidies can impact markets, too.

INFLATION.  Inflation erodes the purchasing power of money over time.  Real estate is seen by many as a hedge against inflation which can increase prices paid for apartment complexes by those who have cash ready to invest.  Inflation can also drive up construction costs, which will have an effect on development and renovation costs.  This, in turn, could slow down new construction initiatives, thus changing the supply and demand dynamics.

SUPPLY AND DEMAND.  The value of our properties is heavily influenced by supply and demand dynamics. A larger supply of apartments available in our region will increase the competition and put downward pressure on the rents we can receive from our residents. 

Factors such as population growth and population trends in our geographic area impact the demand side of this equation. When demand goes up, the vacancies go down and rental prices can rise. 

Economic downturns or oversupply can result in softened demand and a downward pressure on rents.  With lower income, the net operating income for the operator will likely also decline, which will, in turn, lower the value of the property for a prospective buyer.

Disparities between supply and demand can lead to a seller’s market or a buyer’s market.

LIFESTYLE PREFERENCES.  Demand for rental apartments in urban areas may increase with certain demographic groups, such as millennials.  They are looking for experiences with more amenities, convenience, and flexibility.  A growing segment of baby boomers are moving out of their single-family houses with big lots for the ease and change of apartment living. 

Paying attention to shifts in lifestyle preferences will influence the demand or lack of demand for apartments by renters.

INTEREST RATE CHANGES.  The interest rates investors pay for their money are tied to the interest rates set by central banks.  Higher rates mean higher borrowing costs and a drag on those looking to purchase properties.  Lower interest rates tend to stimulate demand because the cost of borrowing is less.  Higher interest rates tend to lower property purchase prices.

UNCERTAINTY ABOUT THE FUTURE.  Perhaps the word here is “fear”.  The more uncertain potential buyers are, the harder it is for them to be confident when they are determining a price they are willing to pay for a property.  As mentioned earlier, rapid changes in the world create this instability and lead to lower levels of confidence, more fear, and less investment activity.


Your turn.  When you look at what is going on in our world, in our nation, in the areas in which you are investing, what are you seeing in the factors mentioned above?  Or, you might be looking at additional factors. 

Where do you get your information? 

Based on your analysis, how would you answer the question:  “Where are we in the multifamily life cycle right now?”  The choices are:

–          Recovery after a Bottom

–          Expansion up to the Top, Growth

–          Contraction after the Top

–          Bottoming


Over 894 members of a Multifamily Investors Group connected with the poll.  Now, of course, this is not a scientific poll.  This is a random sample and only reflects the votes of those who participated.

The most respondents, 44%, said EXPANSION TO THE TOP, GROWTH

The second highest selection, 33% said CONTRACTION AFTER THE TOP

Both at the BOTTOM  and RECOVERY FROM THE BOTTOM receive 11% of the “votes”.


We are, of course, not experts.  We are not able to predict the future either.  We do try to keep up with the information available to us and we talk to many other investors regularly.  We often ask questions of others on Linkedin, in our monthly virtual meetup, and at local in-person meetings.

Mike and I noted that we need to look at the Multifamily Market Life Cycle from two perspectives. 

First, we look at it from a NATIONAL CYCLE understanding.   We see inflation, uncertainty in the minds of prospective buyers, and higher current interest rates as major forces at work in our nation as a whole.  All of these put downward pressure on prices buyers are willing to pay.  This would normally point to us being in or approaching the contraction phase.

We note a reduction in the actual purchase prices being paid for properties compared with the broker’s initial estimates of the sales prices offered.  This would support our observation of downward pressure on prices.  This would also point to being in the contraction phase.

We do see sellers setting their asking price based on proforma or future rents and expenses as compared with prices linked to the current actual T12 numbers.  As buyers, we are looking for the lowest possible price we can pay, since we know our ultimate return is highly correlated with the amount we pay for a property.  This would point to us being in the contraction phase at least.

There are many buyers with plenty of cash to put to work and see the benefits of multifamily.  This is supporting higher prices and lower sales CAP rates.  Especially on larger properties with investor groups with large amounts of capital available, there continues to be a lot of competition with properties that come on the market, driving up prices.  This would point to us still being in the expansion phase or near the top.  Or, if they are still sitting on their cash, waiting for better opportunities, like we are, perhaps this means we are near the bottom.

The second perspective is the more LOCAL MARKET CYCLE t where we are looking to invest.  This comes back to the influence of location, location, location.

In the counties where we are looking and with the properties we have been making offers on, we are still finding there is a lot of competition among buyers pushing the prices up or at least holding them up.  This points to us being in an expansion phase still.    Or we could be in a declining market already.  We differ on this one.

We do see a good bit of new construction here in Florida, particularly in our local counties.  Florida has seen significant population increases over the past four or five years increasing demand for housing.  The cost of single-family houses, because of inflation and interest rates, is increasing the demand for apartments, particularly for Class B apartments.  This would point to us being in the expansion to the top phase locally.

OUR VOTE would be in the early to mid contraction phase, after the top.  We are still very conservative in the offers we are making on available properties.  We expect prices to continue to fall as market factors make it harder for sellers to sell at their initial asking prices.  We see a bottom ahead, particularly as interest rates stabilize and the buyers with a lot of capital have slowed their buying.  Mike thinks interest rates have already somewhat stabilized and won’t return to the “near zero” rates of a few years ago anyway.  This opinion is based on the Federal Reserve’s intention to drive inflation down to 2-percent, although the historical inflation rate has averaged 3 to 4-percent.  That does not leave any room to lower interest rates any time soon.  This would push us to the post bottom and begin of the rise out of the bottom.  

We could be wrong.  The two of us see the competing forces and emphasize one or the other of the forces and talk regularly about where we see the market right now, not always coming out in the same place.  We kind of like this dialog, point and counterpoint of our partnership.


I hope this conversation around the multifamily market life cycle has been helpful.  Please comment or give us a call if you would like to talk further.  Perhaps you can help us get clearer or more accurate in our analysis.  Perhaps you have questions.  We enjoy our conversations with you.

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