Settling into a Slowcession: How Lagging Growth Will Impact Multifamily Investment

In July, Federal Reserve chair Jerome Powell offered what some might consider good news. “Given the resiliency of the economy,” he said, “they were no longer forecasting a recession.” They were, however, forecasting a “noticeable slowdown in growth,” and so the economy is settling into a slowcession, a period characterized by stalled, but not negative, economic activity.

Through a multifamily lens, a slowcession will likely hamper deal activity through 2024. Investors can expect higher interest rates for longer, low deal volumes and seller-buyer misalignment on asset pricing.

Transaction Volume Continues to Trend Down

Multifamily deal volumes are down 70% year-over-year, and the market has experienced four consecutive quarters of declining transaction volume. “That’s a big number,” says David Harrington, president at Matthews Real Estate Investment Services. “And I would expect that to continue in the near term.”

At the beginning of the year, most commercial real estate experts predicted a rebound in transaction volume in the year’s second half. “That was pretty widely accepted,” Harrington says. “Throughout the course of the year, we have had to adjust that narrative because we’re really not seeing any meaningful movement.”

While a recession may not be on the horizon, a slowcession will keep rates higher for longer, and Harrington says the higher cost of capital will create a challenging transactional market for most investors through the next 12 months.

Sellers Hold Out on Pricing

In the last year and a half, sellers and buyers have not been able to align on asset pricing. Although interest rates have climbed rapidly, sellers have held steadfast and a wide bid-ask spread has emerged. A slowcession could serve to drive a deeper wedge in pricing between parties.

“In many cases sellers have favorable debt in place on their assets, and the fact that the economy hasn’t slipped into the negative means that property operations are still good. So, there is an environment that is still uncertain, and it has affected sellers’ willingness to capitulate,” explains Harrington.

He estimates there is still a significant spread north of 10% between buyers and sellers, and it will continue to characterize the market in the near term. Although prices have come down somewhat, in general, sellers remain unwilling to accept the new norm on pricing.

Rent Growth is Receding

On the revenue side, rent growth and strong demand have helped to stabilize the multifamily market, allowing sellers to hold out while navigating the pricing gap. However, rent growth may be waning. Consumers have spent through their savings accounts and the consumer confidence index is down.

In addition, the multifamily pipeline may play a crucial role. Harrington notes that more apartments will deliver into the market this year than any time in the last 50 years, which will put additional downward pressure on rent growth. Reduced cashflow will impact appetite for multifamily investment, but on the bright side could also serve to motivate sellers on pricing.

While the US may have avoided a recession, slowed growth will continue to create a challenging multifamily investment market.

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