The world that we live in has seen major changes over the past two years. The post-covid era has made a shift in the lives of people and perspectives of investors in terms of the way the workforce operates, government policies, and the Fed pumping cash into the economy. With these changes in the economy, there have been massive changes in the real estate market space.
To segment, these changes and dive deeper into the latest trends in the multifamily markets, and the impact of taxation on multifamily Jay Scott, General Partner at Bar Down Investments, joints Rama Krishna on the MultifamilyAP360 podcast. Check out the full episode here.
Trends in real estate and multifamily space
COVID has had a huge impact on the functioning of the workforce. Back in 2020, when the world was under lockdown and a lot of people started working remotely. From 15% of the workforce working remotely long term to now over 25% of the workforce working remotely, which means a lot of people have a lot more freedom to move anywhere they want. This makes it really convenient for them to move to places with nice weather and low taxes. This has caused a bit of a big population shift from the Northeast and the Northwest, down to the South and the Sunbelt areas, because that’s where a lot of people like to live. This has caused see strong population growth, and hence strong growth in rents, and multifamily values. A lot of companies starting to move their headquarters or their warehouses or remote locations to these areas, because they have a lot of workers there or because taxes tend to be lower.
Following the population trends and the employment growth trends, to get an idea of the areas where people and businesses are moving, you will be in a position to understand which markets are likely to do well over the next couple of years.
Impact of taxation on multifamily space
A part of the reason that has caused Florida to be one of the fastest growing states in the country, is that there’s no state income tax. People like to move where taxes are low. Taxation hugely impacts population trends, and so even businesses. Businesses recognize that there’s opportunity in places with low-income tax, and so they’re moving there as well. “It’s gonna be interesting over the next couple of years to see what the tax trends are both at a federal level and at a state level. But I would say, follow those trends because the population is going to follow those trends.”, Jason advised. Keeping an eye on the states that are lowering their state income tax or getting rid of their state income tax, is going to be a boon for the state because a lot of people tend to move into that area which could be really good for property owners in those areas.
Peeking into opportunities in real estate & multifamily market
Over the last couple of years, the cap rates have been going down, and rents have been going up which lead the value to skyrockets. But now, the rents are still going up and the cap rates go up a little bit as well so things are starting to soften. Plus it’s getting much harder to get long-term debt because the numbers aren’t working for long-term debt. This has forced buyers to now get short-term bridge loans and made it difficult to also get the numbers to work. So, fewer buyers generate less demand causing prices to start to drop.
These days people are willing to pay what the property is worth. Talking about what the property is worth, for multifamily, it’s, NOI, which is the operating income divided by the cap rate. Lately, proposed offers are right around that formula, indicating people aren’t paying ridiculous amounts anymore. “But people also aren’t bargain shopping yet. But compared to where things have been over the last couple of years, I see that as a huge opportunity. And I think there will be some stuff on sale, especially in certain markets over the next couple of months.”, Jason said.
If property owners have to refinance over the next year and credit starts to tighten, it may be difficult, and so they’re going to be looking to sell and if they can’t sell quickly, they’re going to get a little bit more desperate. Jason sees this as an opportunity. He is certain that real estate markets, especially multifamily won’t see a crash and is sure of the bright future it holds.
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