Multifamily Buyers, Sellers Are Choosing: Act Now or Stand Down

As the economy sours and speculation over the scope of the downturn intensifies, buyers and sellers in the multifamily sector are migrating into two camps: those who feel compelled to close deals now before market fundamentals erode and the cost of debt keeps rising, and those who are deciding to pull back and wait for the next cycle.

Signs of a cooldown are increasing, even in an asset class that posted 15% YoY rent increases in Q1. Buyers are still out there, but the number of offers and property tours is declining and, as GlobeSt.com recently reported, many of the deals on the table aren’t hitting their whisper prices.

No one is suggesting that the perfect storm of market conditions that has fueled an unprecedented boom in multifamily properties is going to disappear anytime soon.

The tightness of supply in the housing market will continue, delays in new construction will persist and would-be first-time home buyers facing sticker shock from home prices averaging 450K still will need to find apartments to live in.

But the Fed’s rate increases and the rising cost of debt have had a sobering effect on the CRE players who have been trading multifamily properties at a steady clip for the past year. The music hasn’t stopped yet, but many of them have decided to take their seats.

“We’re seeing owners fall into two clear camps,” Ryan Kidwell, senior VP and co-leader of the Seattle office of Mogharebi Group, told GlobeSt.com.

“One camp is moving quickly to market their properties before rates move up again along with debt costs, and the other believes they’ve missed the boat to some degree and have decided to hold until the next cycle,” Kidwell said.

The same dynamic is playing out on the buyers’ side, he said.

“One camp is rushing to place its capital into deals before debt costs increase further, the other is hitting the pause button on acquisitions,” Kidwell said.

Mogharebi, a multifamily brokerage based in Costa Mesa, CA, has seen trading activity begin to slow down, with a noticeable decline in offers.

“If we were averaging 5+ offers on deals, now we’re seeing 2,” Kidwell said, noting that a reduction in offers and property tours typically is followed by an adjustment in pricing.

“The question is how severe the correction will be and how long will it last? How buyers and sellers answer those questions will dictate their strategy for the next 12-14 months,” he added.

The Mogharebi SVP said the rising cost of debt will increase negative leverage in the multifamily sector in the short term. Kidwell said the “time horizon for the return of capital” will be a deciding factor in determining whether owners—particularly those that may be facing negative leverage—choose to sell rather than refinance.

“Some investors will be willing to—or feel it necessary to—hold deals with negative leverage to stay competitive, especially if they view the interest rate spikes as relatively temporary,” Kidwell told GlobeSt.com.

Kidwell told us that most multifamily buyers still are pricing in rent growth, but many are being more conservative in their underwriting as the economic storm clouds gather.

“Even if they continue to include healthy rent growth in their analysis, expenses have increased substantially, so we’re seeing lower NOI projections from some buyers,” he said.

Kidwell said cap rates, which move in correlation to the cost of debt, will expand in the multifamily sector, but not as severely as in other asset classes.