INVESTMENT ACTIVITY REMAINS IN LIMBO

The impact of the Federal Reserve’s sharp interest rate hikes over the past year has had a profound impact on the local multifamily investment market. In the face of both greater pricing and lending pressures, deal activity has simply paused. No major multifamily transactions (projects of at least 25 units) closed in Q2 and we are aware of only one deal that occurred in Q1. This trend is playing out nationally—according to Yardi only $23 billion in multifamily investment sales had been completed through mid-June, a drop of 70% from where deal volume was one year ago.

The increase in capital costs, as well as heightened economic uncertainty have made it extremely difficult to complete any commercial real estate investment transactions. One of the greatest challenges has been the rapid and steep decline in property values stemming from the increase in interest rates and slowing rent growth. The 4.0% to 5.0% cap rates for quality multifamily product that were common just 15 months ago simply no longer make sense now that mortgage rates have climbed from the 3.0% - 5.0% range to the 6.0% to 10.0% range. Sellers still largely want yesterday’s pricing and buyers are holding out for discounts. As a result, there has been little movement in the gap between bid and ask. We continue to see disparities here of anywhere from 5% to 25%. Because of this, unless sellers have a compelling or urgent reason to sell, most are playing the waiting game.

Current market fundamentals do not help the situation. The run up in lease rates of the last few years means it is harder to find apartment product with rental rate growth potential. This is certainly true at the top of the scale, though there may be some value-add opportunities hidden away within the Class B and Class C marketplace. But until multifamily prices reset, it is going to be a challenge for buyers to find properties where they can unlock hidden value to boost returns on investment.

Sacramento Multifamily Market Average Sale Price Per Unit Vs. Average Cap Rate Q2 2023

Sacramento Multifamily Market: Average Sales Price Per Unit Average Cap Rate

That is not to say we will not continue to see activity from long-term players looking to park their money and willing to hold the properties they buy until market fundamentals return to supporting rent growth. This may not be as far away—greater economic clarity emerging over the final half of 2023 could change this landscape quickly. But for now, we expect activity to remain challenged.