Dive Brief:

• Apartment prices continued to increase in April. Still, the rate of growth decelerated, according to a report shared with Multifamily Dive by MSCI Real Assets (formerly Real Capital Analytics), a firm that provides tools and services for the global investment community. Overall apartment sales increased by 7%, but that was driven by one large deal.
• The RCA CPPI, a measure of apartment prices, increased 23% from April 2021 to April 2022, trailing only industrial (which saw a 26% year-over-year jump) among commercial real estate sectors, according to MSCI. Cap rates fell 20 basis points year-over-year to 4.8% in April.
• Although the year-over-year price growth suggests substantial gains, apartment (and industrial) prices only increased 1.3% from March to April, indicating a 17% annualized growth, according to MSCI. From January to March, apartment prices rose 4.2%

Dive Insight:

Apartment deal volume hit $17.9 billion in April, according to a separate MSCI report shared with Multifamily Dive. However, the report says these figures are a bit misleading. Deal volume did increase, but much of that was driven by larger portfolio deals rising 71%, which can be more resilient to short-term financial shocks such as interest rate increases.

Camden Property Trust’s $2.1 billion recapitalization of 7,241 apartment units in 22 properties accounted for 27% of all portfolio activity for the month. 

In the deal, Camden bought the outstanding partnership interests in its two discretionary investment funds from the Teacher Retirement System of Texas, which became effective April 1. Camden previously owned 31.3% of the funds’ interests.

Last year, the REIT funded deals through stock sales. But with the value of the stock market falling, Camden might find it harder to make these types of deals in the immediate future. 

“If you go back from the last month, our cost of capital has gone up pretty dramatically,” Camden Chairman and CEO Ric Campo told Multifamily Dive. “Stock prices have fallen and debt prices have increased. So, from our perspective, the acquisition market isn't as attractive today because our cost of capital is higher.”

Individual sales fall

Without the Camden deal, portfolio sales would have only increased 25% year-over-year and total deal volume would have actually fallen 1%, according to MSCI. Overall, sales of single apartment communities fell 11% year over year. MSCI said that the decline “is a shock and speaks to the severity of the speed of change in the interest rate environment.”

When the 10-year treasury pushed past 2% in March, investors and lenders began to question new acquisitions. However, part of the slowdown in the market can be attributed to the dislocation between buyer and seller expectations, according to George Goyal, founding partner at Three Pillars Capital Group, a Houston-based, vertically integrated private equity firm specializing in Class B and C multifamily communities.

As rates have moved up, buyers expect discounts, but some sellers haven’t moved off their expectations, according to Goyal. “Sellers are now going to have to come off their high horse in terms of expectations on pricing,” he said.

Three Pillars recently sold three communities that closed in early May, but Goyal says that deal was agreed upon at the peak of the market. “The interest rate increases are definitely squeezing cash flows,” he said. “It’s going to hurt investor returns a little bit.”

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