Wall Street Journal speaks with Trevor Koskovich as current economic climate impacts multifamily demand

MINNEAPOLIS, MINN. (April 4, 2023) - Apartment-building sales have declined since a stretch of record-setting transactions peaked in late 2021, reported the Wall Street Journal (WSJ) in its April 4 article, "Apartment Building Sales Drop 74%, the Most in 14 Years." Higher cost to finance and interest rates, regional banking turmoil, flat or declining rents, and falling rent growth are combining to slow demand for the industry's pillar property type. With apartment values shrinking, many landlords won't sell at the current lower prices.

"Now that landlords can't raise rents as before, they are trying to maintain the value of their properties in other ways," Trevor Koskvoich, president - investment sales, told WSJ. When rents were on a steep upward trajectory, "it was OK to be less discerning in your operations," he said. Today, cutting costs, making repairs, and extra effort to keep current tenants are methods being employed to maintain property values.

In Northmarq's 2023 Multifamily Outlook, a similar shift was recorded from the beginning of 2022, leading in to 2023. Initially, the first round or two of rate hikes had minimal impacts on cap rates, but yields began to trend higher during the second half of 2022. The consistent upward trajectory of interest rates, coupled with a less robust leasing environment has widened the expectations gap between buyers and sellers.

This year, 475,000 units are forecasted to be completed (up 20 percent from 2022 levels). While the pace of supply growth in 2023 is largely predetermined by projects that are currently underway, absorption levels are expected to bring uncertainty to the multifamily market. But, according to WSJ, amid the slowdown, opportunities will still be present. Forced sales, for example, are expected to increase. Investors who purchased properties recently with short-term, floating-rate debt are now seeing those loans cost more to pay down than they did when they first borrowed. In summary, borrowers might have to sell their properties if they aren't bringing in enough cash to pay off their monthly debts. "We're in the very early stages," noted Koskovich.

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