by Scott Lebenhart
Given the overall economic climate, the stats could hardly be deemed surprising.
According to a preliminary report by CoStar Group that was recently outlined in the Wall Street Journal, apartment investment sales totaled $14 billion in the first quarter of this year. The figure represents a whopping 74% decline from first-quarter 2022.
The total also “was the lowest amount for any quarter since 2012, with the exception of the second quarter of 2020 when pandemic lockdowns effectively froze the market,” according to the Wall Street Journal article.
Looking ahead, it appears the slow pace of multifamily property sales will continue for a while. But at some point – and perhaps sooner rather than later – multifamily properties will once again become a favorite destination for investor dollars.
The Current Landscape
It’s no mystery why the pace of property sales is so slow. Rising interest rates and volatility in the debt markets – including the recent failures of several regional banks – have made transactions difficult. Slowing rent growth, the impact of a potential recession on renter demand and soaring property insurance costs are giving buyers pause, too. As a result, while there appears to be plenty of capital looking to invest in multifamily, a large gap generally still remains between sellers’ asking prices and what buyers are willing to pay.
In addition, not many distressed properties are available for acquisition right now as those owners still have term on their loans, which gives them the ability to wait a bit longer in hopes that the capital markets will improve and allow them to refinance their current loans with more favorable options than are available today. Investors are waiting for these properties to become truly distressed, and there is widespread belief that more will be on the market later in the year.
It’s quite possible that investment sales won’t pick up real momentum until next year. The Federal Reserve raised interest rates again in March, and according to the Associated Press, there is support among Fed officials for at least one more rate hike this year.
But as we gain more clarity about the interest rate outlook, which could happen later this year, sales activity will begin to rise, and you don’t have to squint hard to see the multifamily sector once again becoming a favored asset among investors.
After all, the industry remains sound. Fundamentals such as rent growth, vacancy and absorption are off of their historic rates, but they’re still at levels that signal a healthy multifamily market. That’s in part because, regardless of the state of the economy, people need a roof over their heads, and the current cost of renting a home compared to owning one is supporting multifamily demand.
Also boosting renter demand is the relative lack of single-family homes. According to CBRE, rising construction costs led to a 41.4% decrease in single-family home completions from 2007 to 2021.
And a potential recession’s impact on renter demand is likely to be relatively minimal, as the recession, if it occurs, is not projected to be particularly deep. Companies still have relatively strong balance sheets, which should help avoid excessive layoffs as the skilled labor market remains tight. Low unemployment will ensure resident demand for apartments remains strong.
In short, apartment communities are well-positioned to, over the long-term, have strong operating fundamentals and to deliver the kinds of risk-adjusted returns that owners and investors are seeking.
Multifamily investment sales are bound to resume their brisk pace at some point. It’s just a matter of time.