Investors, Partners, and Friends,

We hope you enjoyed your holidays, and we wish you a successful and prosperous year ahead.

In this month’s Rockview Review, we dive into three transformative themes which we believe will shape the trajectory of the multifamily real estate market this year and beyond:

1. Revitalized U.S. onshoring efforts,
2. The market’s acceptance of higher-for-longer interest rates, and
3. Lenders finally addressing distressed multifamily loans, driving increased transaction activity

We hope you enjoy this month’s Rockview Review!

Theme 1: Domestic Manufacturing Will Flourish Through AI and Trump’s Onshoring Efforts

The rapid adoption of AI and a renewed focus on domestic manufacturing are reshaping U.S. economic hubs. Investments spurred by the CHIPS Act and protectionist policies under Trump’s administration are set to catalyze growth in industrial-heavy metros like Phoenix, Columbus, and Austin. This shift will create long-term opportunities for multifamily housing in these regions.

Semiconductor Manufacturing Drives Domestic Investment

• Semiconductor Chips and AI: Semiconductor chips, critical to AI advancements, are largely produced in Taiwan, exposing vulnerabilities amid geopolitical tensions with China.
• The CHIPS Act: This $50 billion federal initiative aims to bolster U.S. semiconductor manufacturing, targeting key cities like Phoenix and Columbus.
• Economic Ripple Effects: These hubs are emerging as critical to AI’s growth trajectory, spurring demand for labor, data centers, and housing, making them increasingly attractive for multifamily investors.

Trump’s Push to Onshore Manufacturing Will Reshape U.S. Manufacturing Hubs

• Protectionist Trade Policies: With Donald Trump returning to office in 2025, his administration’s proposed 10% universal tariff on imports and a 60% tariff on Chinese imports aim to strengthen domestic industries.
• Boost to Domestic Manufacturing: These policies are expected to accelerate manufacturing investments in semiconductors and advanced technologies, especially in the Southeast and Southwest.
• Opportunities for Key Cities: Metros with industrial capacity and skilled labor pools, like Austin, Phoenix, and Columbus, are primed to benefit.

TSMC's cutting-edge semiconductor fabrication facilities in Phoenix represents a $65 billion investment to bolster U.S. chip manufacturing and reduce dependence on foreign production.

Capital expenditures on AI by Alphabet, Amazon, Meta, and Google are projected to reach $267 billion in 2025 (Source: UBS).

Theme 2: Market Accepts Higher-For-Longer Rates

Markets have begun to fully embrace the Federal Reserve’s higher-for-longer interest rate strategy, marking a decisive shift from the optimism of significant rate cuts in prior years.

Elevated rates are reshaping the housing market by limiting affordability for homebuyers and locking them into their current mortgages. Multifamily properties, as a result, continue to attract heightened demand, affirming their position as a strong investment option in 2025 and beyond.

Fed’s December Meeting Reshapes Rate Cut Expectations

• Fed’s Message: Federal Reserve Chair Jerome Powell reiterated the Fed’s commitment to maintaining higher-for-longer interest rates during the December meeting. While optimistic about avoiding a recession, Powell highlighted ongoing challenges with inflation and labor market softening.
• Revised Rate Cut Projections: Powell’s comments introduced a more measured policy trajectory, reducing 2025’s anticipated rate cuts to just 50 basis points, down from the earlier projection of 100 basis points.
• Treasury Yields Adjust: Markets have adapted accordingly, with treasury yields rising nearly 100 basis points from their 3Q24 lows. As of January 3, 2025, yields stood at 4.42% for the 5-year and 4.60% for the 10-year.

Multifamily Will Continue to be An Attractive Housing Alternative for Would-Be Homeowners

• Mortgage Rates Surge: Mortgage rates have reached their highest level in six months, with the average 30-year fixed-rate mortgage climbing to 6.91% as of January 2025, according to Freddie Mac (Reuters).
• The Lock-In Effect: Around 60% of homeowners hold sub-4% mortgage rates, reducing home sales and locking potential buyers out of the market (FHFA).
• Rent vs. Own Affordability: Renting remains 30% cheaper than owning, with median mortgage payments at $2,700 compared to $1,748 for rent (MarketWatch, Visual Capitalist).
• Tailwinds for Multifamily Growth: High homeownership costs and mortgage rates are driving sustained demand for rental housing, positioning multifamily assets as key beneficiaries of this trend.

Following the December meeting, the Federal Reserve reduced 2025 rate cut projections by 50 basis points, signaling a more cautious monetary policy (Source: Federal Reserve).

Mortgage payments are forecasted to remain elevated compared to multifamily rents, reinforcing the affordability gap that supports rental housing demand. (Source: CBRE Research).

Theme 3: Higher Multifamily Transaction Volume Anticipated in 2025

With new apartment completions reaching their highest levels and lenders addressing problem loans, transaction activity is expected to rise significantly in 2025, creating opportunities for disciplined investors.

Multifamily Supply Growth Will Peak

• Peak in New Completions: The U.S. will see record levels of apartment completions in 2025, marking the height of this cycle before construction activity slows considerably.
• Market Stabilization: Absorption rates are projected to exceed 90% for new units in overbuilt markets like Austin and Phoenix, supporting improved rental market fundamentals, according to CBRE.
• Balanced Supply-Demand: A contracting supply pipeline post-2025 is expected to create healthier dynamics, leading to stronger rent growth and lower vacancy rates.

Multifamily Lenders Will Be Pushed to Solve Their Problem Loans, Driving Transaction Activity

"Owners are grappling with valuations that remain well below acquisition prices, and lenders are no longer willing to wait," said a Senior Researcher at CRE Finance Council. "The big question is who buys the distressed syndicator properties as institutions shy away from these Class C assets."

• CLO Lenders Underwater: Multifamily properties purchased at record-high prices during 2021, often financed through CLO bridge debt, remain deeply underwater. Both owners and lenders had anticipated rate cuts to boost valuations and provide refinancing opportunities, but with rates still elevated in 2025, these hopes have diminished.
• Pretend and Extend No Longer: As loan extensions become increasingly unfeasible, lenders are beginning to confront underperforming loans through foreclosures or distressed sales. Rockview Capital has observed a notable uptick in such scenarios, with expectations of continued growth in distressed transactions throughout 2025.
• Increased Transaction Volume Expected: The anticipated influx of distressed assets, delayed from 2024, is finally expected to hit the market in 2025, driving significant transaction activity and presenting opportunities for well-capitalized investors.

Multifamily markets with high supply pipelines are stabilizing as construction slows and absorption improves (Source: CBRE 2025 Multifamily Outlook).

Conclusion

We look forward to taking advantage of these themes and trends in 2025 and beyond to make disciplined investments for our investors. We’re grateful for your continued support and wish you an amazing start to the year.

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Until next time,

Rockview Capital LLC

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