Institutional Investors Are Primed to Buy Apartments in H2

Institutional investors have remained on the sidelines for most asset classes this year, including their erstwhile darling multifamily. But a new analysis by Institutional Property Advisors suggests they will return in force in the second half of 2023. That will largely be due to the long-expected end to interest rate hikes by the Federal Reserve, which should introduce some stability in rates as well as some much-needed price discovery. “Considerable dry powder has been accumulating and is primed to be deployed,” according to IPA. 

Of course, even just a little more activity will be welcome to the space. Based on preliminary estimates, transaction velocity in the $15 million-plus category during the first half of 2023 was down about 65 percent from the opening six months of last year, IPA says. 

Compared to the first half average from 2010 to 2019, the number of trades was within 2%. Metros that posted the biggest number of $15-million-plus trades during the first six months of 2023 include locations coast to coast and in between in the Sun Belt. Those standing out were New York City, Atlanta, Dallas-Fort Worth, Houston and Los Angeles.

Locations where institutional investors pumped in dollars more relative to the first half of last year or fell by a small margin include Chicago, also New York City, Riverside-San Bernardino, Calif., San Jose and Seattle-Tacoma. The reason is that moderate supply pressure and elevated barriers to homeownership help keep Class A vacancies tighter in those locations.

Some metros saw the opposite trend and steep contractions in trading, including Charlotte, Dallas-Fort Worth, Houston, Las Vegas and Salt Lake City. Robust migration and household creation are pushing institutional investors to focus on these Sun Belt markets in the immediate picture but accelerated cap rate compression during the pandemic and notable supply pressures could stall deal flow, IPA says.