DLP Capital's Investment Outlook for 2024

Dec 18, 2023

DLP Capital's Investment Outlook for 2024

Dec 18, 2023

For decades now, housing supply has fallen short of what is needed to keep housing affordable. In fact, there has been a shortage of housing ever since most of us were born, with the issue impacting nearly every community in every corner of America. Homeownership is now out of reach for so many, with the monthly cost of owning a home now $1,298 more than the cost of renting a professionally managed apartment. This marks the highest buy-to-rent premium on record, according to the National Multifamily Housing Council.¹ While our housing supply problem is a national issue, however, solving it is a local one. That’s why DLP Capital will continue to forge ahead in 2024 investing in, building, and financing attainable rental housing for working families throughout the Sun Belt and beyond. In addressing the housing affordability issue, we continue to see excellent opportunities to achieve both our core mission—and the opportunity for superior returns.

Interest rates, of course, have caused havoc on the housing market, whether it be prospective single-family homeowners or multifamily sponsors. On one hand, we have seen 2023 interest rates stay higher for longer than most of us expected; on the other hand, we have begun to see rescue/distressed acquisition opportunities peek through the housing haze. That means new buying opportunities for DLP Capital and for other strong sponsors that we finance. We believe the fundamentals of rental housing will be strong mid- and long-term, and as we enter 2024, we continue to position ourselves to capitalize on opportunities—with the expectation that mortgage rates will retreat to the high 4% to low 5% levels by end of 2025, creating further opportunities to buy and develop new communities in this market environment.

There has been an overabundance of new multifamily product in mostly larger, urban markets at a time when rent growth is decelerating. Nationally, we expect rents to see modest growth of only 1%-3% in 2024, compared to 2022, which had the second-highest rent growth in this century, 6.2%². DLP Capital focuses on secondary and tertiary markets where there are more opportunities for superior returns–and less competition. As a result, in DLP Capital’s portfolio we expect to maintain robust rent growth of 4%-7% in 2024. We also expect a 1% decrease in our vacancies, outperforming the general market where we expect a 1% rise in vacancies to over 7% nationwide. Inflation, of course, is impacting expenses nationally and in our own portfolio, with anticipated increases of 2%-4% in both cases. Nonetheless, we foresee a 6%-8% increase in the net operating income of our existing portfolio, compared to a flat performance marketwide in 2024.

Multifamily Supply

Regarding the national multifamily pipeline, Fannie Mae expects starts to end the year down 6.4% compared to 2022³. This decline is anticipated due to short-term supply saturation, high interest rates making new construction financing expensive, and lenders constricting their construction lending. Added to those development challenges are rising costs of land, labor, and construction, in addition to prolonged entitlement processes, and planning and zoning restrictions that limit development of attainably priced housing. Despite those challenges, there still remains a short-term oversupply of Class A multifamily in top-tier markets.

Given a decreased availability of capital for development and construction of new housing, we expect rental housing stock in many such markets to continue to decline. As such, in 2024, we plan to invest $300 million or more of new preferred equity into existing communities in need of enhancements, spanning as many as 10 communities. In addition, we plan on investing a similar amount, $300+ million, into building 5-10 new communities.

New Multifamily Communities Coming On-Line

An example of excellent market dynamics is DLP Capital’s very promising investment in our Dream Kissimmee development near Orlando, which began leasing in October 2023 and is already seeing strong demand. This 304-unit community has the type of submarket dynamics we find extremely appealing: easy access to all of Orlando’s attractions and employers; minutes from International Drive; five miles from Disney; and 15 minutes from Orlando International Airport. The appeal of this property to area workforces is expected to be strong and, in fact, the site was originally slated by Disney itself to create housing for cast members.

Looking ahead, we also have 97 duplex cottages going vertical in the 2024 first quarter in Palatka, a northern Florida city. Inland locations such as Palatka—only 30 miles from east coast beaches—allow us to offer much more reasonable rents than what renters can find in coastal cities. Our new community, which includes private outdoor living space for every unit, is expected to lease swiftly, providing much-needed quality housing to an area that has seen slow but steady growth for 30+ years.

Single-Family Supply

According to the National Association of Realtors (NAR), the median US home sales price was $391,800 in October 2023, compared to a high last year of $414,000. While price escalation has tempered, NAR’s index of pending home sales illustrates continued hesitancy among buyers and sellers. Pending home sales declined 1.5% in October 2023, which was down 8.5% from a year ago, and all four US regions—Northeast, Midwest, South, and West—had year-over-year declines, with pending contracts remaining at historically low levels due to high mortgage rates. Pending home sales are a leading indicator of housing activity, as homes go under contract a month or two before sold, so a year-over-year decline bodes negatively for future sales closed⁴.

We expect to see continued reticence by homeowners to sell. Yes, they might reap substantial gains, but what can they buy in place when interest rates may have doubled since their purchase? The sales of existing homes, in fact, decreased 14.6% from October 2022 to 2023⁵. Fortunately, we expect rates to begin declining in the second half of 2024, by .25%-.5%, and by this time next year mortgage rates may be in the low- to mid-6% range. Rates should further improve heading into 2025, normalizing at levels of high-4% to low-5%.

In terms of new construction, single-family homebuilding continued to rebound in October, amid an acute housing shortage, but the highest mortgage rates in nearly 23 years could slow momentum and delay the overall housing market recovery. In addition, the rebound probably reflected permits approved months ago before mortgage rates broke 7%. In fact, confidence among homebuilders slumped to a nine-month low in October, with builders reporting lower levels of traffic⁶.

Managing Interest-Rate Flux to DLP Capital Benefit

DLP funds: Our loan origination rates rose this past 10 months from low-9% range to low-12% range
Increased loan rates offset higher leverage costs, resulting in our investment funds’ still generating double-digit portfolio returns
We’re increasing interest rates on renewal loans coming up for extensions
As rate increases level off/decrease, our portfolio-wide average yield should remain near current levels, providing opportunities for superior returns to investors

Robust DLP Capital Lending Programs

In the meantime, DLP Capital anticipates a record year for our lending programs. We expect to finish out the year surpassing $1.5 billion in originations, spanning 100+ communities, which is not only in line with our own commitment to build and enhance thriving communities—but our lending programs help strong sponsors/operators do the same. Our financings span from new and existing single-family and multifamily rental communities to manufactured housing and RV communities, among other asset types. We anticipate an average interest rate return of 12% on these originations in 2024, with a sub-60% average loan-to-value, while offering attractive 70%-80% loan-to-cost terms. Many of these financings will go into the DLP Lending Fund, which has distributed more than $120 million of earnings to investors since its 2014 inception, and we have every intention of continuing to target superior returns and distributions going forward.

In summary, fundamentally, the US supply-side is not able to build enough housing to keep up with demand, especially in areas with significant population growth such as in the Southeast and Texas. Meanwhile, the cost of homeownership has skyrocketed, with interest rates exacerbating the problem, and rental housing stock will continue to decline due to decreased availability of capital for new development and construction.

Those market dynamics, however, continue to present excellent opportunities for DLP Capital, as we have a depth of capital resources. We will continue to invest in our focus for 15+ years—rental housing that is attainable to working families. That includes targeting double-digit returns in each of our funds, including aiming for an increase in returns to investors heading toward 2025 and beyond, due to opportunities we expect to close on in 2024.