Interest rates cloud the multifamily market
The voracious appetite for multifamily investment properties and the breakneck pace of new multifamily developments have slowed due to rising interest rates, said Gerrit Hillebrand, multifamily vice president of Colliers.
“We don’t see bidding wars anymore,” Hillebrand said. “What used to be competitive bidding at or above the asking price, we are now seeing multiple bids in the same range of 90-92% of the seller’s perceived value. It’s very telling, and it’s based on the restriction put in place by available debt.
“It’s just a sign of the times – if debt service increases and you have less competitive offers, it affects prices across the board.”
Just a few quarters ago, before interest rates rose, it was common to see more than a dozen offers coming in on a multifamily investment property, and the most serious offers were always above the asking price. by the seller. Today, institutional buyers are biding their time and waiting for the dust to settle, Hillebrand told NNBW.
“The transactions we see locally are 8-15% devaluations depending on the product, and my counterparts in larger markets are seeing groups move away from $1m and $2m down payments because they would lose a lot more if they ended up running at their contract price given where interest bearing takes them,” Hillebrand said. “They are looking at holding periods of five, seven and 10 years, and if there are better deals around the corner, they move away from those serious deposits to keep larger amounts of equity available for more. better opportunities.”
Deal promoters who bundle multi-family properties often don’t get calls from the investment community, Hillebrand added, a trend that was unheard of even at the start of the year.
“A lot of investors put their pencils down and wait for the dust to settle during the transition,” he said. “There is a lot of guesswork going on. Sellers want last year’s prices and don’t realize things have changed, but buyers know that because they’re applying for loans and getting different responses than they’ve received in recent years.
“Since mid-February and early March, I have seen several deals fail due to debt,” Hillebrand added.
The chill also extends to multi-family development. Hillebrand said there are between 8,000 and 9,000 new multi-family gates in the development pipeline at various stages of the planning and construction process, and some of those projects are unlikely to materialize due to uncertainty over broader stock markets and the rising cost of taking on debt.
“Call it hesitation or fear, but there are some very sophisticated individuals coming out of what seemed to be very well-positioned and well-located projects,” he said.
However, there is good news to report in the multifamily market. According to the Nevada State Apartment Association, the cost of renting an apartment appears to be stabilizing in the multi-family Reno-Sparks area.
After years of double-digit increases in average rents, year-over-year rents rose just 4.1% in June, a significant drop from the 13.3% increase year-over-year set for mid-2021, NVSAA reported.
Susy Vasquez, NVSAA’s acting executive director, said the decline in rent increases is mostly because supply has finally caught up with demand.
“Just before the pandemic, Reno-Sparks was heading into 18 months of uncertainty – we didn’t know how we were going to fill all of these new apartments that were going to be released over the next 18 months because there was so much to come on board and there weren’t as many people moving,” Vasquez told NNBW. “But then the pandemic hit, and basically everyone from the Bay Area and Silicon Valley moved to Reno and ate each of these units.
“We commercialized these areas a lot at the time this happened,” Vasquez added. “But we’re heading into another period where we have a lot of units online – there are 4,500 units under construction, and that’s a lot for Reno-Sparks.”
Vasquez said the flattening of rent increases should extend through the year and into 2023. Rising mortgage rates will keep many multi-family renters in their apartments rather than buying single-family homes, and l ‘significant development pipeline will continue to ease pressure on demand.
“We may be overbuilding,” Vasquez said, “but that’s not a bad thing because it means we’ll continue to have that normalized market. Any supply availability will further extend the single-digit growth (in rents), and vacancies will lead to lower asking rents and move-in concessions.
“Rents are stabilizing, but not for people who currently live in apartments and whose leases are up for renewal,” she added. “Their rents are based on six months to a year ago, and they will be marked to market (rate), which could be over 4%.”