Apartment Sales Fall Amid Rising Costs, Widening Bid Ask Spread

Apartment sales fell as the cost of equity and debt financing increased in July, according to the latest data from the National Multifamily Housing Council—but demand still remains strong in most markets relative to supply. 

Yardi Matrix reported similar findings, noting that multifamily recorded $93.3 billion of sales through June, with much of it due to strong first quarter activity.  That’s slightly below the pace set during 2021’s record $222.3 billion of sales. However, the second half is likely to be less active than the same period in 2021, in large part due to the spike in debt costs, Yardi said.

The NMHC noted in its most recent quarterly survey that the apartment market has recorded its sixth consecutive quarter of tightening conditions. About 56% of respondents reported unchanged conditions. And 54% said that rising interest rates, geopolitical uncertainty and the risk of recession have decreased investment in the multifamily market.

Ten percent of respondents held the opposite view, saying that investment has actually increased because multifamily is perceived as an attractive asset relative to other alternatives. Thirty-five percent of respondents said multifamily investment has remained the same.

 “Continued interest rate hikes from the Fed have translated into higher longer-term rates and a higher cost of both debt and equity,” said NMHC’s Chief Economist, Mark Obrinsky. “While these higher rates have cut into investor proceeds, many sellers are reluctant to lower prices, causing a sharp drop in sales volume.”

Yardi noted that most fixed-rate multifamily loans that originated before the interest rate surge carried coupons of 2.75% to 4.25%, depending on leverage, sponsor and terms, but rates in the second quarter of 2022 rose by about 200 basis points.

Two-thirds of respondents said equity financing was less available than in the prior three months, while just 3% of respondents said it was more available. And a whopping 95% said now is a worse time to borrow than three months ago, marking the second consecutive quarter where a “vast majority” of respondents reported deteriorating borrowing conditions, according to NMHC.