2022 will be remembered as a gloomy year for apartment investors. Following more than ten years of inexpensive debt, we are seeing the end of that era. The Federal Open Market Committee has raised interest rates five times so far this year. The prime rate rose to its highest level since 2008 in September, and further hikes are expected. The committee predicts that interest rates will be at least 4.25% or even 5% by the end of the year. Apartment investors are hesitating since this is the fastest increase in interest rates since the 1980s.
The second half of 2022 has witnessed a reduction in deal volume, according to Taylor Avakian, an associate vice president at Matthews Real Estate Investment Services and an authority on the Los Angeles multifamily market. He says the excessive increase in interest rates is having a major impact on investors. The majority of buyers secure financing, and with interest rates now two full points higher, returns are suffering, he claims. From his experience working with a wide range of investors, including family offices and institutional buyers, Avakian believes that all types of investors are being more cautious.
The Financial Community Is Split.
The level of investment activity is declining, although not uniformly. When interest rates rise, private investors are more at risk because they use the debt markets more frequently and have fewer capital options. According to Avakian, “This has a huge impact on mom-and-pop owners who have owned these buildings for decades.”
As opposed to early in the year, when 1031 exchange buyers were driving activity, they are now slowing down their buying. Avakian notes that because buyers are now obligated to put up more equity to offset increased rates, many of these “would-be” transactions are no longer making sense.
The Winds Are Against High-End Multifamily.
With rising interest rates, Class-A properties are most at risk. According to Avakian, higher-end assets are already experiencing price drops. Prior to the upticks in rates, Class-A apartment properties were trading at 3% or high 2% cap rates. Avakian says that no longer makes sense to anyone. He adds, “Investors would rather put their money in bonds at 4% than a 3% multifamily class-A building.”
As borrowing rates climb, investors have chosen to invest in affordable housing instead. “I think a lot of investors are moving in that direction and incorporating affordable housing into their portfolio,” says Avakian.
Investors have high hopes for the near future. Avakian and his clients anticipate better prospects and pricing over the next six months. Keeping your eye on the ball and your head in the game is time well spent. He concludes, “If a deal makes sense today, write an offer.”
The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for multifamily properties for sale.
