May 2022 Edition - The Tide has Turned

One of the things I love about this business is its ever-changing nature.  Just like the changing of the tides, we rotate through the ups and downs of buyer’s and seller’s markets. But, unlike the tides, changes in our markets do not happen on a predictable schedule, do not happen on a daily basis and do not affect all areas of the country equally.  Instead, we must watch for the signs and do our best to prepare for the changing landscape. 

After soaring prices and record-high transaction totals in the fourth quarter of 2021, real estate investors cut back on spending in the first quarter of 2022.  Hardest hit by this shift was the multifamily market which is the only sector of the market to see property values slip according to CoStar data. It was predicted that transaction volume would pull back in the first quarter of 2022, but not at the scale experienced.  The volume of transactions dropped in the first quarter to $43.8 billion after an extraordinary historic run-up surge of activity in the fourth quarter totaling $97.7 billion.  This was the largest quarter-over-quarter fall in CoStar’s recorded history, narrowly beating out the nosedive we experienced in the second quarter of 2020 as the pandemic took hold.  After 17 straight months of increases, the headline rate for US commercial real estate property growth finally slowed between February and March 2022, according to Real Capital Analytics.  The company’s National All-Property Index dropped 0.4% which was the first month-over-month decrease since June 2020.

Multifamily pricing also faltered after 12 consecutive quarters of gains.  Prices fell 1.0% in the first pullback since the fourth quarter of 2018.  Commercial real estate property owners may see their portfolios decline in value if the assets were purchased during the last few years. It usually takes commercial real estate pricing nine months to a year to adjust to market changes.  

Buyers will be more reluctant to pay higher asking prices due to higher interest rates but there is still a large amount of investment money already designated for multifamily investment for the year.  These sums are currently over $250 billion and many of the firms holding the money will continue to invest at low cap rates to put the money to work instead of sitting on the sidelines waiting for cap rates to rise.  Many of these firms will lose or forfeit their capital if the funds are not invested within a one-to-three-year time period.  

Additionally, the long-term nation-wide housing shortage contributes to price stability and keeping cap rates down.  Occupancy rates for multifamily properties remain in the high 90’s and rents continue to increase.  The southeast has seen unprecedented rent growth since the start of 2021 and historic levels of liquidity in the capital markets have pushed valuations in the multifamily market to unprecedented highs.  Despite rents rising passively in markets across the country, value-add properties are the most sought-after deals on the market, and the competition for them has all but erased the very proposition on which such deals are based.  Reports of value-add properties being sold above replacement cost in the hottest markets has become commonplace.

Despite rising interest rates and a potential recession, the housing demand may be too strong to cause any significant negative change in the multifamily market.  Historically, real estate has proven to be very resilient through inflationary periods and the apartment market leads the industry.  Apartment investors are, however, very concerned about rising interest rates and inflation and are resetting their expectations for changing market conditions in terms of what returns will be and what they will pay for an asset.  

Bottom line, demand is expected to be between 25% and 30% lower than previously thought.  Apartment demand will rise, but at a moderate pace through 2035 according to the National Multifamily Housing Council.  

“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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