Dive Brief:

• Despite the fact the Federal Reserve’s interest rate increases began earlier in the year, the boom in apartment transaction volume following COVID-19 peaked in August 2022.
• Given that sales have fallen more than 60% year over year for the past 10 months, it shouldn’t be surprising that apartment transaction volume fell 74% YOY to $8.2 billion this August, according to a report that data firm MSCI Real Assets shared with Multifamily Dive. 
• In August 2023, apartment prices fell 14.9% from a year earlier. MSCI notes that the pace of decline is decelerating, with values only dropping 9.7% from July to August. “Even this pace of price decline may not be enough to inspire investors to jump into the sector at higher levels,” it said in the report.

Dive Insight:

The deal volume decline was evident in both the garden and mid- and high-rise segments. Both fell at over 70% YOY in August. Individual sales of mid- and high-rise properties declined 44%, while those trades for garden apartments dropped 69%.

MSCI points to negative leverage on new acquisitions as the biggest roadblock standing in the way of new deals. Average mortgage rates on seven- and 10-year fixed-rate apartments rose from 3.4% in October 2021 to 5.5% by June 2023. 

As mortgage rates increased 210 basis points, cap rates only rose 40 bps to an average of 5.1% in August 2023. For deals to start happening again, MSCI said the relationship between interest rates and cap rates needs to normalize to “where leverage provides a boost to returns.”

Price declines

But leverage isn’t the only factor for apartment investors. As values decline and the potential for more distress increases, some buyers may not want to make purchases in an environment where prices may still be falling.

“The main factors affecting the apartment market in the near term are buyers and equity sources taking a wait-and-see approach looking for signs of distress or price concessions due to the uncertainty around future rent growth and financing costs,” Hugh Frater, former Fannie Mae CEO and current chairman of the board at New York City-based housing product development company Vessel Technologies, told Multifamily Dive.

Michael McClearn, acquisitions manager and operations coordinator for Long Beach, California-based private apartment owner Plenty of Places Apartment Homes, is one of those who expects to see more distress in the market.

“I think there will be some pain and the best buying opportunity we’ve seen in the past five, six or seven years,” McClearn said. “You take the window when you can get it.”

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