In the Grip of a Sales Freeze, Signs Suggest a 2024 Market Thaw

Introduction:

The multifamily investment market, which showed signs of life during the summer, has once again hit a roadblock as Treasury yields soared, creating renewed volatility. Sellers who were cautiously optimistic about the market’s recovery are now facing uncertainty, and buyers are hesitant to commit amidst fluctuating borrowing costs. As we approach the end of 2023, multifamily investment sales remain in a deep freeze, reminiscent of the challenges faced at the beginning of the year.

The Current State of Multifamily Investment Sales:

Throughout 2023, quarterly multifamily investment sales volumes in the U.S. have stagnated around $19 billion, reflecting an 82% drop from the fourth quarter of 2021, as reported by CoStar’s Multifamily National Report. The spike in Treasury yields and the subsequent volatility have disrupted the pace of investment sales, leading to a standstill in the market. Buyers and sellers find themselves in a familiar situation, struggling to determine the true value of for-sale assets in the face of rapidly changing debt costs.

Factors Contributing to the Slowdown:

Beyond the challenges posed by borrowing costs, various factors influencing the operating performance of apartment communities have given potential buyers reason for caution. CoStar’s report acknowledges concerns such as declining household formations, increased supply deliveries, and weakened demand. However, it emphasizes that the multifamily industry has successfully navigated similar challenges in the past, suggesting the market’s long-term health remains robust.

The Current Landscape of Investment Sales:

Despite the overall slowdown, the limited investment sales that are occurring tend to involve higher-quality communities. CoStar notes that four- and five-star asset sales comprised approximately 54% of sales activity in the current year, up from just under half in the first nine months of 2022. The appeal lies in acquiring discounted high-quality assets and managing risk through ownership of properties with lower probabilities of unexpected capital expenses.

Outlook for 2024:

As we look ahead to 2024, there is optimism that the thaw in multifamily investment sales will come, provided the Federal Reserve offers clear guidance on potential interest rate hikes. The maturation of about $255 billion in multifamily loans next year, according to CoStar, is expected to bring more properties to market as refinancing options remain relatively unattractive. Notably, many apartment communities purchased in 2021 and 2022 with floating-rate loans will face challenges as initial three-year terms expire, compelling some owners to sell rather than inject more equity.

Opportunities for Disciplined Investors:

Amidst the challenges, there is a silver lining for disciplined investors in 2024. The forced sales resulting from maturing loans and rate-cap purchase requirements may create attractive purchasing opportunities. Owners facing these circumstances may be willing to sell at a loss to avoid further equity injections, presenting potential for strategic acquisitions.

Conclusion:

While multifamily investment sales face a deep freeze as 2023 concludes, the outlook for 2024 holds promise. With the resolution of uncertainty around interest rate hikes and the maturation of loans, the market is poised for a thaw. Disciplined investors should keep a watchful eye on potential opportunities, as strategic acquisitions may arise from the challenges faced by owners dealing with maturing loans and rate-cap requirements. As we navigate the current turbulence, the resilience of the multifamily industry remains a beacon of hope for a stronger and more dynamic market in the near future.