Things seem to be at a standstill in the multifamily industry. Contrary to the low levels of transactions in the market, there have been many changing variables impacting the multifamily environment. From rising interest rates to stricter lending terms, uncertainty has become a staple of the industry.
As a result of rising financing costs and declining future rent growth projections, “buyers are cautious,” according to Yardi Matrix director of research Paul Fiorilla.
The entire conversation surrounding uncertain buyers and sellers who aren’t adjusting their expectations brings back up this debate over the industry: Is this a buyer’s market or a seller’s market?
Below, we’re diving into what experts are currently seeing, and we’ll expand on the complexity of this debate.
Matrix reports that investors saw average cap rates of 5% towards the end of 2022, which was higher than the 4% range seen at the start of 2022.
Sellers Are Stagnant
Experts say that apartment owners aren’t selling unless they need to. Reasons an owner might need to sell include a death, partnership break up, or a capital event that requires restructuring. However, distress is also expected to increase moving forward.
Fiorilla explained that rising interest rates and banks giving out less leverage will result in more distressed properties in the market. This includes properties that will have to refinance into debt with a higher interest rate, and properties that aren’t performing well.
The Bright Side
Many investors continue to see multifamily as a better place to invest their money than alternative asset classes.
Fiorilla anticipates that things will pick back up once the market stabilizes and buyers and sellers are confident that they can underwrite deals with more reassurance than currently exists in the market.
Other investors believe market activity will resume at normal levels after June 2023. In response to rising cost of debt and rate caps, investors expect to see more owners opt to sell rather than refinance.
Seller Expectations Remain In 2021
It doesn’t seem like multifamily transaction volume will return to normal levels for now. This is partly due to the fact that sellers are still looking for 2021 prices and exit cap rates.
The spread between where buyers are bidding and sellers are asking is large. Buyers can’t afford 2021 prices because of the higher costs of leverage. Sellers want to sell at the price and exit cap rate they underwrote for. Both buyers and sellers are waiting for the other side to budge, and as a result, the market has frozen.
There are also many fortunate sellers who have long term debt on their property and don’t need to sell.
Once investors realize the new market we’re in, and the pressure on owners with short term debt increases, transaction volume is expected to pick up.
Consequences of Less Sellers
There is some good news for sellers in this current market environment. With less sellers on the market, there is more competition among buyers for available deals. Though there isn’t as many buyers as previously, there is still strong demand for deals from buyers with access to capital.
Which Markets Are Going Strong?
Despite current market conditions, there remain markets that continue to see strong demand. These markets are for the most part located in the Sun Belt region.
Savvy investors are remaining focused on markets with growing supply and demand trends, and growing populations.
What About Apartment Residents?
According to a Geekwire article, “overall home purchases declined more than 40% from a year earlier.” This suggests that current apartment renters will continue to rent. Despite declines in home values in recent months, houses remain unaffordable for many Americans. With strict lending requirements and high interest rates, renters are expected to remain where they are, which means apartments will continue to be in high demand.
A buyers market is a market where the environment favors those looking to purchase a property. In simple terms, this occurs when there are more owners looking to sell a property than there are people looking to buy.
In a buyers market, the buyers have more options, and less competition. Buyers are more likely to be able to negotiate and get a discount.
A seller’s market is the opposite of a buyer’s market! In a seller’s market, the environment favors those looking to sell a property. This market occurs when there are more people trying to buy a property than there are sellers looking to sell. In a seller’s market, buyers might pay market or above market price for a property in order to secure a deal. Sellers benefit from this environment because they can typically sell faster and even at a higher price than they’d anticipated.
Where Are We Now?
Some might argue we are currently in a seller’s market, because there are plenty of buyers, but not enough sellers to keep up with demand. However, since transactions have seen a sharp decline in recent months, sellers are also struggling to sell at their desired price. As a result, others might argue that due to the unfavorable lending terms and interest rate environment, buyers can negotiate for lower prices.
The current market is unique for many reasons, but it’s also important to note that there are still opportunities out there. We are underwriting deals everyday, and although most of them do not pencil out, it doesn’t mean we aren’t looking.
As long as investors stick to their principles, and mitigate the impact of higher interest rates and stricter lending terms, deals can happen.
Times like these remind me of Warren Buffet’s famous quote: be “fearful when others are greedy, and greedy when others are fearful.”
Where do you find yourself standing?