For the last few years, the multifamily sector has been a favorite among the commercial real estate investment community, with buyers unable to resist such strong fundamentals as high demand for rental housing and mushrooming rental rates. However, according to the National Multifamily Housing Council’s Quarterly Survey of Apartment Market Conditions, certain factors have been hindering investor activity in this asset class. After a period of warm and fuzzy vibes from lenders, multifamily borrowers have been finding it increasingly difficult to obtain debt and equity to execute transactions. As is the case for borrowers seeking financing for other asset types, interest rates are high and requirements are increasingly stringent, but the multifamily sector also has to contend with the fact that apartment rental rates are slowing in growth.
NMHC’s low Equity Financing Index reading reflects the fact that 57 percent of survey participants indicated that equity financing is less available than it was three months ago. The Debt Financing Index was low too, with 67 percent of respondents reporting that conditions have worsened for debt financing. So, it’s no wonder that the NMHC Sales Volume Index came in low as well, demonstrating the fifth consecutive quarter of declining transaction activity.
Multifamily deal flow will continue to be hobbled by high interest rates and reluctant lenders, but there is something investors can do to slow the decline in transactions. There is a gap between multifamily property sellers’ price expectations and the figure buyers are willing to pay in a climate where the growth of rental rates is slowing. Buyers who can get financing for an acquisition are looking for some compensation in the form of cash flow from sharply escalating rents, but rental rates are no longer growing at the skyrocketing pace they once were. Barring a sudden drop in interest rates, if the multifamily sector is to see a turnaround in sales activity, then buyers and sellers will have to start to meet in the middle on property pricing.