Multifamily Dealmakers Aren’t Hitting Their Whisper Prices Anymore and Institutional Equity Is Moving In

Forty-five days ago, a multifamily asset on the market would receive bids from 30 groups, unintentionally driving up the price for the property. Today, the buyers are still there but there are fewer of them and many of the deals aren’t hitting their whisper price, according to Noam Franklin, Managing Director – Head of Eastern US, JV Equity & Structured Capital Group, at Berkadia. “Almost every deal I’ll ask if the whisper price has been hit and the answer is no,” he tells GlobeSt.com. “There still is a healthy return but there is some discount,” usually around 6 to 10%. 

Multifamily, as healthy and robust as the asset class is, apparently is not immune to the forces of gravity after all. The same economic uncertainty the greater markets have been experiencing, led by spiraling inflation and rising interest rates, is nibbling around the edges of the apartment asset class with some clear effects. For many in the market, these cracks in the market may be worrisome but for Franklin they spell opportunity. Franklin represents institutional equity in the housing market and for the last year many of the multifamily deals he has sent over have been too rich for institutional capital seeking out value-add JV investments. Once they would unwind the rents and pencil in the money on upgrades, they would find that the return was not equal to the risk they would have to take. So these life companies, private equity providers and pension funds, for the most part, stayed on the sidelines instead of investing through JVs.

Instead, what they did was take a barbell approach, Franklin explains, blending some ground up deals, some core plus and so on to reach a value add return.

The multifamily market hardly noticed the difference given the abundance of private and GSE capital that has been targeting the space in recent years. “The feedback we received from sponsors was that, at the right time when we need an institutional partner we will call,” Franklin says. They rarely did. 

The environment has changed dramatically in the last several weeks, Franklin says. “Now, for the first time we have value-add JV deals that our capital relationships can go to committee with and get approvals. Before that, prices were so high it was hard to make sense of it from the perspective of an institutional partner. Now, suddenly, the phone is ringing off the hook.” 

Sponsors are finding they are not getting the leverage and pricing they thought they would get 30 days ago. They might go to their network and find they can only raise, say, $12 million instead of $30 million. Franklin is also seeing cap rate expansion in several markets. “For example, we have a client who is tying up a deal in Phoenix right now and the cap rate is in the mid 4s and we haven’t seen a multifamily deal in Phoenix trade above a 4 in a long time. I am confident that deal will tie up at a mid 4 cap rate.”

None of this is to say it has become a buyer’s market or that there will be serious distress in the market. “But it is much more a buyer’s market now than it was 30 days ago,” Franklin says. And institutional capital is ready to jump in.