Peter Muoio Muoio: “The weakness over the last three months actually demonstrates that the segment can’t defy gravity forever.”

IRVINE, CA—Many multifamily investors are uncertain as to the staying power of the expansion, and interest rates are likely to rise further, suggesting that price weakness could persist following the amazing run-up that we have seen, Ten-X’s chief economist Peter Muoio tells According to the firm’s CRE Nowcast, overall CRE pricing declined in September for the fifth consecutive month, and pricing in the apartment sector declined for the third consecutive month. With the prolonged slump, pricing’s annual growth rate is at the lowest level since Nowcast was initiated, and several sectors are in similar slowdowns.

We sat down with Muoio to chat about apartment-sector pricing and where he sees it heading. What is your overall view of the continued weakening of apartment prices?

Muoio: We had been surprised earlier this year when apartment prices continued to rise while other segments were seeing the repercussions for the jump in interest rates after the election and the late-year Fed tightening, so the weakness over the last three months actually demonstrates that the segment can’t defy gravity forever. Do you view this as simply a correction or does it have more dire implications for the sector?

Muoio: While apartment fundamentals are still generally quite healthy, most markets are seeing a decided upturn in delivery of new units to varying degrees, and as a result, while vacancies remain low, they have started to tick up. This, coupled with decelerating rent growth, has slowed NOI growth, and that trend is likely to continue. With many investors uncertain as to the staying power of the expansion and the likelihood of interest rates rising further, this outlook for fundamentals suggest that price weakness could persist following the amazing run-up that we have seen. What effect will continued price softening have on apartment rental rates and, ultimately, on the housing market?

Muoio: Rental rates are continuing to rise, though at a slightly slower pace, because vacancies are still low, notwithstanding the increases of late. In some markets the increase in deliveries has pushed vacancies up faster, with rents softening as a result. We expect national apartment rents to slow, but not decline in coming years, though again there will be differences market to market. In our estimation, we are at peak new supply this year and next, and then completions begin to simmer down.

Single-family housing affordability has its own issues: existing home prices are rising rapidly, and mortgage rates are up somewhat but vulnerable to increases in the coming years as Treasury rates rise. Housing is also dealing with very low inventories, furthering affordability concerns. So, while rising apartment rents would seemingly be favorable to single-family ownership, it is not that clear cut because of those issues and depends a lot on at which market you are looking. What else should our readers take away from this report?

Muoio: Commercial real estate prices across the segments are drifting after the run-up of recent years. This reflects the maturity of the expansion—soon to be the second-longest in modern history—rising interest rates and increasing supply pipelines in segments/markets. While economic growth continues to chug along, supporting demand for space, these other factors and all sorts of technology-based changes that have altered the way we use real estate space, suggest prices will remain under pressure.