September 2023 MS Trends

I have been asked on more than one occasion over the past few weeks, “why is it taking longer to lease my vacant units?” Because of that, I want to use this edition of our Market Minute to examine the trends as they relate to asking rents and occupancy.  Since we endeavor to bring you relevant market reports that take only a minute to read, we will cover south MS in this edition and south AL in the next edition.

Class A rents, while up a modest 3.76% over the past 12 months, are up 6.48% this year so far.  That is due to the fact that average rents fell slightly from November of last year to January of this year.  Keep in mind that 4% annual increases are healthy and normal for the MS Gulf Coast.  We have been spoiled with double digit increases for the previous 2 years.

A year ago, occupancy was 96.14%.  Vacancies steadily increased for the 7 months from September, 2022 to March of this year until occupancy hit 92.3%.  As a result, rents were flat for the most part during that period.  Since March, occupancy rates have bounced back to 95.4% and we are seeing average rents across all units back to nearly $1,300 per month, $1,298 to be exact.

We potentially have 500 or more units in the pipeline coming on line in 2024. Consequently, you could see occupancy rates fall a few points and only moderate rent growth over the next 12 months.

Class B rents are still up double digits for the trailing 12 months.  From September of 2022 to August of this year we have seen 11.26% rent growth.  Like the class A properties, we saw a decline in occupancy from September of last year to February of this year from 94.48% to 92.52%. While occupancy levels have only bounced back halfway to 93.39%, average rents have increased to $1,107 per month across all units.  Even if occupancy rates continue the current trend upward, it is hard to imagine or predict continued rent growth above 10%.  The class B units may be benefiting from the tightness of the class A market which, as mentioned above, has a decent number of units in the pipeline.

Rents for class C properties have declined by 4.96% since September of 2022. Occupancy rates remained steady through the end of last year and dropped from 94% to 92.69% in January of this year.  Since then, occupancy rates have remained virtually unchanged at 92.5% and average rents are within a dollar of where they were in February. $804 as of August compared to $805 in February. It is interesting to note that the average rent dropped to current levels 3 or 4 months prior to the occupancy rate falling.  

So, let’s answer the query, “Why is it taking longer to rent my vacant units?”

For class A owners, you are not even asking that question.  There are only 6.7% more units available today than there were a year ago.  You may have seen your waiting lists shrink and wait times get shorter, but you are getting them rented.

For class B and C owners.  The answer is simply that there are 20% more class B units, and 26% more class C units, on the market today than there were last September.  This is why it may be taking longer to rent your vacant units.

Like you, I love to learn. As you probably know, there are no good sources for reliable market data in our area. For markets like Atlanta or Houston, for example, CoStar, Real Capital Analytics and RealPage do an OK job.  The best and most accurate market data I get comes from meeting and speaking with owners, investors, and property managers. I share that because I would love to hear your experience in the current market.  Are you bucking the trends?  Are you seeing anything different than what I am seeing?  Please reply and share your thoughts.

Next edition we will focus on the trends in south Alabama.  I will try to get that out in the next couple of weeks.

Thank you for taking the time to read this edition of our Multifamily Market Minute. We welcome your comments, questions, or future topic ideas. Feel free to forward this to anyone who you feel may be interested in this information.  The Molyneaux Group exists to help real estate investors maximize their investment returns while minimizing their risk.

July 2023 Sales Velocity

I hope this email finds you in great spirits and that your long holiday weekend was nothing short of amazing! This month, we will look at sales velocity.  As expected, sales velocity fell off the cliff in the first quarter of 2023.  At the risk of coming across as Captain Obvious, I will share some numbers and some thoughts.

As always, I'm here to try to bring you some clarity in our murky and ever-evolving multifamily investment market. Today, we're going to delve into a significant development that has caught no one by surprise: the striking drop in sales volume for apartment complexes from the 1st quarter of 2022 compared to the 1st quarter of 2023.

I have read many reports on the multifamily investment sales market from a national perspective.  Depending on which report you read, sales volume is down anywhere from 60% to 65% this year over the same period last year.  As someone who is active in south Mississippi and south Alabama, I wanted to look at this from a regional perspective.

For the purposes of this report, I only considered properties in south Alabama and south Mississippi with 20 units or more.  In the first quarter of 2022, our market was bustling with a total of 26 transactions for apartment complexes. Fast forward to the same period in 2023, and we were not shocked to witness a dramatic decline, with only 8 transactions taking place (a notable 69% decrease in sales velocity, and slightly more than the national decline).

Last year in Q1, Alabama’s velocity outpaced Mississippi’s velocity by a little more than 2 to 1.  This year’s Q1 is evenly divided between the 2 markets.  Consequently, Alabama is seeing a 78% decline between last year and this year and Mississippi is seeing a 50% decline.  I would not read anything into that except that the south Alabama market is typically more robust than the south Mississippi market.

Here is where I risk coming across like Captain Obvious. Let’s briefly discuss the factors at play that have led us here:

  1. Higher Interest Rates: The prime interest rate was 3.5% in the first quarter of last year.  This meant you could easily buy a multifamily investment property at a 5% or 6% cap rate and achieve positive leverage.  Today, the prime interest rate is 8.25%. Transaction velocity is likely to remain subdued until values have adjusted to the higher rates.  I don’t see this happening before the 4th quarter of this year or Q1 of 2024.
  2. Cost of Insurance: The cost of insurance has eaten into the Net Operating Incomes so deep that value has been eroded temporarily.  This is not sustainable.  After the insurance companies make more record profits this year, we anticipate that more companies will jump into the market and create more supply and a more competitive environment.

Despite this downward trend, it's essential to view these changes through a wider lens. Real estate markets are cyclical, and fluctuations are a natural part of the industry. Whether we are at a point in the cycle where values are rising, or we are at a place where values are declining, all I can be sure of is that it will change.  We think that the market, and sales volume, will be better in the first quarter of 2024.

So, what does this mean for you? If you are considering selling, cashing out and retiring, we are recommending you hold on for another 9 to 12 months.  On the other hand, if you are considering selling and exchanging into a bigger, better investment, or different property type, it doesn’t really matter because you would be buying in the same market that you are selling in. And that is true in any market, good or bad.

Recognizing market trends and understanding the factors driving them allows you to make more informed decisions. In our upcoming updates, we'll continue to monitor the multifamily investment market closely, providing you with timely updates and valuable insights. 

If you have any questions, concerns, or simply want to chat about the market, don't hesitate to reach out. I'm always available to discuss and assist you in any way I can.

Until next time, stay positive, stay informed, and keep moving forward!

May 2023 Average Expenses

Last month we took a deep dive into effective rents along the MS Gulf Coast and the insane cost of insurance this year. In this update we will examine the average expenses by category, and as promised, we are adding south Alabama data to our report.

Why is this critical?  Over half of the $2.9 trillion of outstanding commercial mortgages are maturing in the next 2 years. Many of these loans were last refinanced 3 to 5 years ago.  The prime interest rate in June of 2018 was 5% and in June of 2020 it was 3.25%. Today it sits at 8.25%. Your lender, and loan docs/covenants, require you to maintain a minimum Debt Coverage Ratio (NOI/Debt Service = DCR). The cost of insurance has increased by an average of 99.46% so far this year which is having a significant negative impact on NOI. This combined with higher mortgage payments could be the proverbial perfect storm that could cause you to have to bring more equity to the table when refinancing.  Most lenders require a 1.25 DCR.

Because of this, we are meeting with owners and conducting an analysis of their current DCR and, more importantly, what the DCR will be based on current interest rates and the loan balance at maturity. Then we are helping them develop a plan to mitigate the impact of the out-of-control insurance costs combined with rising interest rates. At the very least, we want to remove the stress and surprise elements from the equation and, in the best case, eliminate the need for them to bring more equity to the table or to be forced to sell in a down market.

Before I share the expense data, I have to say that typing the above words was painful. That is because I am an optimist and that felt so negative.  The late great Zig Ziglar used to claim that he was so optimistic, that he would “go after Moby Dick in a rowboat and take the tartar sauce with him.”  I can relate to that.  I know that it is going to get better.  The top insurance professionals tell me that these high rates are not permanent, and we should begin to see them deflate in the next 9 to 12 months. I am also optimistic that the prime interest rate will drop to the low to mid sixes in the next 12 to 18 months. So, for most owners who are interested in selling now, our advice (except in rare instances) is to hold on for 9 to 15 months and they should do much better.

It is now more important than ever to make sure you are paying attention to the expense side of the ledger. For example, I have had success getting property taxes reduced simply by showing the tax assessor’s office similar properties in the area with much lower taxes.  And it is so easy to find out what other owners are paying in taxes online.  I bring up taxes because that is the expense that seems to have the most variance from property to property.

The below expenses are from calendar year 2022.  I have not included payroll and related expenses because they vary so much by size of portfolio.  Nor have I included management fees as many properties are self-managed and the numbers would skewed and of little value.  It should also be noted that the cost of insurance is up 99.46% in the first 4 months of this year on average.

Mobile/Daphne MSA Average Expenses

Expense CategoryAnnual Average/unitMonthly Average/unit
Property Taxes$681$56.75
Insurance (2022)$746$62.17
Operating & Maintenance$1,091$90.92
Utilities (common areas)$665$55.42

Gulfport/Biloxi/Pascagoula MSA Average Expenses

Expense CategoryAnnual Average/unitMonthly Average/unit
Property Taxes$833$69.41
Insurance (2022)$1,046$87.17
Operating & Maintenance$674$56.17
Utilities (common areas)$468$39

If you would like a complimentary loan and DCR analysis, or if we can be of any help, please don’t hesitate to contact me by phone or email.

Thank you for taking the time to read this edition of our Multifamily Market Minute. We welcome your comments, questions, or future topic ideas. Feel free to forward this to anyone who you feel may be interested in this information.  The Molyneaux Group exists to help real estate investors maximize their investment returns while minimizing their risk.

April 2023 Insurance

The number one issue facing apartment owners along the Gulf Coast right now is the rising cost of insurance. We are seeing renewal quotes ranging from $1,500 per unit to as high as $4,000 per unit depending on the age of the buildings and distance from the coast.  The problem is that so many insurance companies have pulled out of the market that there is very limited capacity (supply), and the number of properties (demand), significantly exceeds that capacity.  To make matters worse, the older your property, the fewer the companies that will quote it, and the higher the premium will be.

Here are a couple of guidelines to help you prepare for your renewal:

If your property was built 2015 or later, congratulations!  This seems to be the sweet spot and you will have more options.  Budget 1.5 to 2 percent of replacement costs for your annual premium. I should mention that they are calculating replacement costs at $130 to $140 per square foot.  This means you could see premiums between $1,600 and $2,400 per unit.

At the other end of the spectrum, if your property was built between 1980 and 1995, you should budget between 2.25 and 2.5 percent of replacement value.  This means you could see annual premiums between $2,500 and $3,000 per unit.

As you know, there are a lot of other factors that go into it, and I am not an insurance broker.  I am just a commercial real estate investment broker who sells a lot of apartment properties and I am sharing what I am seeing in the market.

It is now more important than ever to make sure you are maximizing your effective rents. More than 80% of the properties I analyze have below market rents.  We have seen double digit increases in rents along the MS Gulf Coast each of the past 2 years.  During the past 12 months alone, average effective rents have increased by 14.04%.  Below are some statistics for the MS Gulf Coast as of February, 2023.  We will be adding South Alabama stats in the coming few months so don’t go away.

CategoryAverage Eff. RentAverage Eff. Rent PSF
Class A$1,224$1.20
Class B$1,046$1.01
Class C$819$1.00

Here is a breakdown by the property’s age.

Built InAverage Eff. RentAverage Eff. Rent PSF

In addition to making sure their rents are at market or better, many of the owners we work with are eliminating their debt, when possible, and self-insuring for wind.  Let’s face it, with deductibles so high, you will likely be replacing your own roofs even if you are insured for wind.

Thank you for taking the time to read our first Multifamily Market Minute. We welcome your comments, questions, or future topic ideas. Feel free to forward this to anyone who you feel may be interested in this information.  The Molyneaux Group exists to help real estate investors maximize their investment returns while minimizing their risk.