It's Still Not Clear If Multifamily Has Hit Bottom

The brilliant parodist Tom Lehrer decades ago may have been the first to mention “sliding down the razor blade of life.” Many have jokingly used the phrase over the years, but it may be a shave a little too close for comfort in the multifamily sector, according to new stats from MSCI.

Apartment deal and valuation growth had taken off during the pandemic as an influx of capital from Federal Reserve easy money strategies to restart the economy helped push up demand, which dragged transactions and rent growth along. However, the top of the rise was August in 2022, and there has been a continuous stretch of falling deal volume until August 2023. That made a year-over-year downward pace of 60%.

The question has become which factors could continue the slide and what might be necessary for a reversal:

Negative leverage is still a strong factor. “The assumptions underlying investments in late 2021 and early 2022 were cast aside as inflation worked to push interest rates and the cost of financing higher.”

Mortgage rates have soared, as everyone knows. While their growth has slowed, it hasn’t retreated, and 7-to-10-year fixed-rate multifamily loans went from 3.4% in October 2021 to 5.5% by June 2023. “While mortgage rates have risen 210 bps from their trough, apartment cap rates have only increased 40 bps to an average 5.1% in August of 2023,” MSCI wrote. “Until the relationship between cap rates and mortgage rates normalizes to one where leverage provides a boost to returns, it is difficult to see scenarios that would drive deal volume to higher levels.”

Property prices hit their peak in July 2022, and they’ve been heading down since. The Real Capital Analytics CPPI for multifamily is down 14.9% year over year in August. Though things have been cooling and the annualized drop between July and August was down to 9.7%. “Even this pace of price decline may not be enough to inspire investors to jump into the sector at higher levels,” MSCI said.

Transaction volumes varied by the type of multifamily. Overall, August transaction volume was down by 74%, with year-to-date volume down 67%. Sales volumes for single assets suffered least, down 62% year over year in August and 65% year to date. Mid and highrise were 71% down in August, 63%$ for year to date. Gardens sunk by 76% in August and 70% year to date. Portfolio and entity sales were hit hardest: -92% in August and -74% year to date.