March 2022 Edition - Current Status of the Multifamily Market in The Carolinas and Virginia
If you have been searching the multifamily market in the Carolinas and Virginia lately then I’m sure you have noticed that opportunities to purchase are very limited and that asking prices are very high. A year ago, if you had asked me about CAP rates in these states, I would have told you, generally, Class A properties are selling for around a 4.5% CAP, Class B’s for around a 5.0% CAP and Class C’s sell anywhere from 6.0% to 10.0% depending on the specific property and its location. That has all drastically changed. In today’s market, asking CAP rates for Class A and B’s are ranging from 2.5% to 4.0% and Class C’s are 5.0% and up, depending on the property. This is assuming you can find a property you like and can outbid the competition. Most A’s and B’s on the market are being sold on a call-for-offers basis with multiple bids on each property. Winning bids are based on proforma cash flows and not on actual historical financials. They also commonly require a nonrefundable deposit of 3.0% to 5.0% of the purchase price. Non-refundable offers have become a way for investors to curb competition and provide sellers with more certainty of closing.
“The multifamily market across the US is extremely competitive due to limited supply, low interest rates and available cash. While increasing risk for the buyer, nonrefundable offers are often successful.” (T. Gallard Uphon, Bass, Berry & Sims PLC)
The high level of competition is also allowing sellers to push for other concessions. Such as shortened due diligence periods, increased earnest money deposits, shorter closing periods, fewer seller representations and warranties, lower limits on liability for breaches of representations and warranties, or fewer conditions to close. This is definitely a seller’s market and buyers will need to stretch to make returns pencil out to ensure that their offer is the best to win the deal.
To avoid, or at least try to minimize the competition, investors are looking for more off-market properties. Unfortunately, desirable off-market properties are very hard to find.
When compiling my March 2022 Edition of the Available Opportunities List which is a compilation of all the properties five units or greater listed for sale in North Carolina, South Carolina and Virginia, the total available property count came to 406. Looks like a big number but when you break it down to classes or number of units you begin to see how tight the market is.
Available Properties by Class:
Available Properties by Unit Count:
In summary, North Carolina had only 28 Class A properties and 28 Class B properties on the market at the first of March. Of these, only 38 properties have 100 units or more.
South Carolina had only 12 Class A properties and 22 Class B’s as of the first of March with only 17 being 100 units or greater.
Virginia had 26 Class A properties and 33 Class B’s with 46 of these being 100 units or greater.
A significant percentage of available properties in all three states are Class C (55.0% in North Carolina and 45.0% in South Carolina and 45.0% in Virginia). On a number of units basis, the number of Class C properties with 100 units or more in North Carolina amounts to only 25.0%, South Carolina Class C’s total 17.0% and Virginia Class C’s total 30.0%.
While the current level of optimism is encouraging, economic forecasts can shift dramatically due to unforeseen circumstances. Inflation, labor shortages and supply chain management were at the top of mind for U.S. CEOs according to The Conference Board’s C-Suite Outlook 2022 Report issued in January. Since then, global issues and our political response have taken center stage. A stable, rules-based global order has been great for business over the last 30 years. Suddenly that stable world order is in doubt as a result of Russia’s invasion of Ukraine. Russia’s attack will have geopolitical consequences and negative effects will be felt by the multifamily industry. Experts in global risk analysis tend to believe the war will result in a new normal that will cause a reset of values, a serious recalculation of a property’s risks and slower, more cautious, and more anxious deal making for years to come. Most analysts are revising their inflation forecast upwards and revising their growth forecast downward for the next 12-18 months. A prolonged period of inflation can do serious damage. Charles Hecker, a partner at global risk consultancy Control Risks and a specialist in geopolitical dangers thinks, “Friction will increase and caution will become the norm. Geopolitical risks loom large in a way they haven’t for three decades. We will see investors and businesses being more careful, there will be more foresight, and being more cognizant about the way we invest will be critical.”
“Just-In-Case You Missed It” is a monthly letter prepared for multifamily owners and prospective owners. It is a compilation of multiple articles from multiple sources or a reprint of an article from a specific source (source credit given). Its purpose is to present both facts and opinions that may influence our multifamily business in the Southeastern U.S. If you have any questions and/or would like to discuss any of the comments above, my conclusions or your multifamily business, please contact me at your convenience. I can be a valuable resource to you without adding expense to your budget. I look forward to speaking with you and having an opportunity to meet with you. I am always at your disposal to assist you with your multifamily business. If you would like to review previous editions of my monthly “Just-In-Case You Missed It” letter they are posted on my website, www.rickbakermultifamily.com.
Respectfully,
Rick
G.F. Rick Baker, CCIM
Multifamily Specialist/Investment Advisor
www.RickBakerMultifamily.com
2504 Tinderbox Ln.
Greensboro, NC 27455
Cell: 336.549.6083
Email: rickbakermultifamily@gmail.com
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