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Sellers “unwilling to budge much on pricing” results in deals mostly drying up, NMHC said.
LAS VEGAS, NEVADA (January 23, 2023) – Two Federal Reserve Board chairmen this week signaled that they favor a quarter-point rate hike at the next meeting February 1, 2023.
That’s down from the half-point hike the meeting before that and four consecutive increases of 0.75 points prior, which have translated to a higher cost of debt financing, causing buyers to seek a higher rate of return, according to a new report from the National Multifamily Housing Council (NMHC).
Mark Obrinsky, SVP of research and chief economist, NMHC, said in prepared remarks that “with sellers unwilling to budge much on pricing, apartment transaction volume has largely dried up.”
NMHC’s Quarterly Survey of Apartment Market Conditions for January 2023, which measures apartment finance fundamentals based on a survey of its members, saw its Market Tightness Index register at 14 this quarter—well below the breakeven level (50)—indicating looser market conditions for the second consecutive quarter.
Over three-quarters of respondents (78%) reported markets to be looser than three months ago, while only 5% thought markets have become tighter. Another 16% of respondents thought that market conditions were unchanged over the past three months.
Sellers Must ‘Meet the Market’
Thomas Olivetti, managing director, investment sales at Northmarq, tells GlobeSt.com that multifamily investment sales transaction volume has slowed dramatically over the past six months.
“The cost of capital is driving asset pricing with higher interest rates combined with lower leverage and overall economic uncertainty,” Olivetti said.
“There is plenty of capital that needs to be deployed but deals are only happening when sellers are willing to meet the market. Some owners continue to internally value their assets without regard to current market conditions which creates a sizeable spread between what buyers are willing to pay vs. prices that make sense to sellers.”
He said that properties that are currently being marketed offer sellers an opportunity for price discovery, and while many buyers continue to actively underwrite and offer, the sellers must decide if they are going to move forward.
Values are down 20% to 30% in some markets where going-in cap rates were in the low 3% range in early 2022 and are now 5%+ coupled with slowing rent growth and increases in vacancy.
“We expect sales transaction volume to be down significantly for at least the first half of 2023,” according to Olivetti.
‘We’ve Never Been on the Phone More’
Kevin Crook, director of acquisitions and dispositions at Investors Management Group, tells GlobeSt.com that most multifamily buyers anticipate that rates will normalize in 2023.
“There are interesting deals out there that we’re looking at in certain micro markets where rents and values will outperform,” he said.
“But interest rate volatility creates a challenging environment for underwriting deals that will produce predictable returns.
“As buyers, we’re not sitting on the sidelines waiting for conditions to improve after Q1. We’ve never been on the phone more. We’ve never been busier connecting with the industry heavyweights and referral partners in our network. We’re putting in the work knowing that there are big opportunities to capture in this market shift.”
Cost of Buying ‘Simply Too High’
Michael J. Romer, Managing Partner, Romer Debbas, tells GlobeSt.com that inflation is the double-edged sword that the real estate market does not need.
“For far too many, especially those that require financing, the cost of buying is simply too high,” he said. “It artificially inflates home prices (and seller expectations) while, at the same time, devaluing the dollar in every buyer’s pocket. The real estate market desperately needs interest rate stability.”
Interest Rates ‘Not as Bad as Buyers Think’
Lisa K. Lippman, agent at Brown Harris Stevens, tells GlobeSt.com that although she is busy, completing at least a deal every two weeks, market volume is down.
“Whenever buyers and sellers don’t agree on prices, nothing happens, and the market is at a standstill,” Lippman said. “Sellers should look at the market through the eyes of a buyer; if rates go up even one point, pricing must be reflective. Cash buyers will expect a discount as well as they do not want to pay more than someone seeking a mortgage.”
Working with buyers, Lippman said, “interest rates are not as bad as buyers think they might be, with many customers receiving rates in the high 4s to low 5s.”
Lenders to Act with ‘Significant Restraint’
Doug Ressler, business manager, Yardi Matrix, tells GlobeSt.com that debt availability will be constrained in 2023, with lenders acting with a significant amount of restraint.
“Lenders will focus on lower leverage, with an emphasis on debt service coverage,” Ressler said. “Fannie Mae and Freddie Mac remain active, in line with their mandate to provide liquidity to the market, but they have had their allocations reduced.”
Banks, life companies, securitization programs, and private equity funds all have constraints that will limit activity relative to recent years, he said.
Stronger Price Alignment Now Than Q4
Jon Morgan, Co-Founder and Managing Principal of Interra Realty, tells GlobeSt.com that in middle-market multifamily sales, he’s starting to see a stronger alignment between buyer and seller agreeing on bid versus ask than they were in the fourth quarter.
“Then, sales remained very strong in our space,” Morgan said. “There has clearly been some adjustment in both buyers’ and sellers’ minds to help bridge prior gaps in pricing. We have properties that we previously had on the market in prior years that did not transact. Many of these are now going to contract with renewed seller mindsets and rental rates that were materially stronger than they were during our prior efforts that have helped offset interest rate impairment to value.”
CA-Based 1031 Exchange Deals Worthy
Kimberly Stepp, principal, Stepp Commercial, tells GlobeSt.com that apartment transactions in the Santa Monica/West Los Angeles market have definitely slowed.
“However, investors that are trading out of a 1031 exchange or those that can pay all-cash have a significant advantage and are able to negotiate pricing with sellers given more certainty of closing,” she said.
“With tight inventory, more of these buyers are looking at fewer properties, so if a property is well-located and meets buyer criteria, we are getting fewer bids, but these bids are reasonable and can create a favorable situation for both the buyer and seller.
“This year, I believe that we will start to see more transactions take place beginning in the second quarter as overall, would-be sellers are in a holding pattern and are waiting to see what will happen in the capital markets before listing an asset.”
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Las Vegas, Nevada (September 6, 2022) — Thomas Olivetti is now managing director – investment sales in Las Vegas. Olivetti has closed over $1.7 billion in multifamily transactions over the last five years and has broken records for both the largest single asset multifamily sale in Nevada history, as well as the largest price per unit market-rate multifamily asset sale in Nevada history. He joins Bryan Mummaw, managing director – debt & equity, who came on earlier this year to co-lead the expansion of the Las Vegas office.
Olivetti will collaborate with the Las Vegas debt/equity team consisting of Scott Monroe and Travis Tartamella. “Working hand-in-hand with Thomas and our investment sales platform is a huge value-add for our multifamily debt/equity clients and visa-versa,” said Monroe. “With Northmarq’s nationally recognized debt/equity operations, investment sales platform, loan servicing program, we are fully equipped to bring value to our clients, at any step of a deal.“
Olivetti holds a Bachelor of Science in Finance from Arizona State University.
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NorthMarq’s Scott Monroe will share his insight into current commercial real estate finance trends during the Capital Markets panel at the InterFace Las Vegas Multifamily Conference on April 24.
MINNEAPOLIS (February 15, 2017) – NorthMarq Capital Presidents Jeff Weidell and William Ross announced two promotions in the company’s regional offices. Scott Monroe, senior vice president-Las Vegas, and Gary Cohen, senior vice president-New Jersey, were promoted to the position of managing director.
Both Monroe and Cohen will retain their local production roles but will add more oversight of their respective offices, primarily in achieving hiring, development, and production goals.
Prior to joining NorthMarq Capital, Monroe was a senior vice president at Johnson Capital Production, where he financed debt and equity for commercial projects. Before that he worked at Q10|Bonneville Realty Capital from 1996-2010 and was a top producer, averaging over $155 million in production per year. From 1996-2007 he funded over $1.5 billion. He worked at John Burnham Company from 1983-1996 as a top producing mortgage banker. At John Burnham Company, he was recognized as investment officer of the year in 19984, 1985, 1987, 1990, 1992 and 1994.
“We are very pleased that Scott is now managing director of our Las Vegas office. Scott has been with the company since mid-2013 and has been in our Million Dollar club consistently,” said Jeff Weidell, president. “He is in the process of building his office, which includes a new associate producer, vice president and an experienced analyst.”
Monroe is an active member of the Urban Land Institute (ULI), Southern Nevada NAIOP and the International Council of Shopping Centers. He received a Bachelor of Science degree from California State University in San Diego, where he majored in accounting and was named to the Dean’s list. Monroe was a Lieutenant in the Marines from 1974-1977.
Prior to joining NorthMarq Capital in 2011, Cohen ran the New Jersey office of Centerline Capital Group which focused primarily on FHLMC and FNMA debt originations. Cohen is a graduate of the University of Maryland and has been active in various charities and coaching youth sports.
“I am pleased to announce Gary Cohen’s promotion to managing director of our New Jersey office,” said William Ross, president. “Gary joined NorthMarq Capital in 2011 and is a 20+ year veteran of commercial mortgage banking. We look forward to Gary leveraging his extensive experience and know-how to the benefit of the New Jersey team.”
