Apartment Sector Won't Close 2023 on an Upbeat Note
MSCI explains that despite positive attributes and optimism about the 10-year Treasury yield falling, multifamily is unlikely to close the fourth quarter on an ‘upbeat note.’
Multifamily was on a rough par with industrial during the pandemic. Both were preferred investment types, seeing strong growth in valuations and falling cap rates. But everything has taken a beating as huge capital flows stopped propping up unrealistic values, high interest rates made deals far more difficult to do, and cap rates climbed. And that includes multifamily, even though it has some strong characteristics, according to MSCI.
“The apartment sector remained as the largest, most liquid commercial real estate sector in November,” the firm wrote. “Despite that positive attribute, deal volume fell from a year ago. Despite optimism around a reversal in the 10yr UST in recent weeks, the apartment sector is not on pace to close the fourth quarter of 2023 on an upbeat note.”
There has been economic news that many see as optimistic. The yield on the 10-year Treasury seems to have settled in well below 4%. The Fed seems to have enabled a so-called soft landing. However, MSCI points out that “it may take months for such optimism to hit the apartment investment market.” Deals closing in November started far earlier, creating a delay in attitudes.
Apartment sales activity was down about 68%, year over year. “Deal activity normally revises up for November when we publish our year-end figures each January, but even a normal revision will not boost volume to a pace that closes the fourth quarter at anything like last year’s levels,” MSCI wrote. “Sales in December would need to total $40.2b just for the volume in Q4 2023 to remain unchanged relative to 2022.”
Another reason for low numbers is the lack of “entity-level deals” that bring large volumes of dollars even if unit volume in dollars could be relatively fixed.
“Apartment prices fell in November, but the pace of decline is moderating,” they wrote. “The RCA CPPI for the apartment sector fell at a 12.1% YOY pace and while a double-digit decline is never a healthy sign, the index had fallen at a 14.5% pace as recently as August.”