Here Are the Factors That Could Stop the Continuing Slide in Multifamily Transactions

From the heights of the pandemic wave, multifamily properties hit valuations, cap rates, and rent hikes that were unheard of. Then came inflation, Federal Reserve-hiked interest rates, and a big impact, like on most of commercial real estate, as MSCI noted in a report on capital trends. “Growth in apartment deal volume peaked one year ago in August of 2022. Activity in August of this year continued a 10-month stretch of deal volume falling at a year-over-year pace of more than 60% each month,” they wrote. “Several factors will help determine if this slide continues into the coming months.” The increase in mortgage rates that might normally support the business has become a burden, rising from an average 3.4% on 7-to-10-year fixed rates in October 2021 to 5.5% of June 2020. That’s a 210-basis point shift, but multifamily cap rates only increased 40 basis point to 5.1% in August 2023. Prices peaked in July 2022 “and have been sliding since then, with the RCA CPPI for apartments down 14.9% from a year earlier in August.” That means negative leverage. “Several factors will help determine if this slide continues into the coming months,” they wrote. The slide has been slowing and the annualized drop between July and August moved to 9.7%. Transaction volumes dropped in all multifamily categories in August, both monthly year over year changes and year-to-date volumes compared between 2022 to 2023. Total apartments transaction volume was -74% year over year in the month and -67% year to date. For garden, it was -76%, -70%; mid to highrise, -71% and -63%; single asset, -62%, -65%; and portfolio and entity, -92%, -74%. Cap rates in 2023 are down well over 50%. “The take-private transaction for American Campus Communities in August of 2022 does distort total activity, however,” they wrote. “Deal volume remains a bit muted without entity-level deals to provide a boost. The sale of individual assets was not as bad for the mid/highrise segment of the market as it was for garden apartments, with activity down 44% YOY. Sales volume for single assets in the garden apartment market was down 69%. Whether down 44% or 69%, however, these types of declines point to challenges in overall market liquidity.”