Main Takeaway: Deals are getting repriced at record levels. Despite that, sentiment among owners and investors is robust, but they should still expect higher price variability in the short term as debt costs and inflation stay elevated.
Story: NMHC reported in their Quarterly Survey of Apartment Construction & Development Activity that 76% of multifamily developers reported experiencing deal repricing over the last three months ending Q4 2022.
Paul Bergeron of Globe Street comments on this construction data, noting that deal repricing is actually stabilizing from pandemic levels where supply chains and labor shortages were at record highs. Paul Rahimian, CEO and founder of Parkview Financial, says:
In addition to this, multifamily loan origination in Q4 of 2022 saw a massive decrease of over half year-over-year. Typically, Q4’s see the highest lending volumes; this year, they were down 54% YoY and dropped 23% QoQ.
A new survey from Berkadia found that almost all (92%) commercial real estate professionals expect more distressed deals to come online in 2023. This reflects the ongoing sentiment of increased cap rates and deal repricing.
Despite these expectations, Wealth Management comments on the above report noting:
Deal repricing will be further exacerbated by the amount of multifamily debt maturing in 2023 and 2024 amidst higher interest rates, putting downward pressure on prices. According to data, a record $450B is maturing this year and next, highlighting the risk of rising rates and asset valuation.
That said, the same study found that “investor appetite from global sources continues to be deployed into multifamily, as a percentage of total US commercial real estate totaled 40.3% in 2022, up 990 basis points from the 2015-2019 average of 30.4%.
Nevertheless, the era of free money is over, and in previous years owners and investors weren’t pricing in the higher risk of debt costs. Now, they are being forced to, and it is causing a recalibration of asset prices across the board. The multifamily market may move from overperformance over the past few years to more equilibrium between supply, demand, and pricing.
This means buyers who can pencil and underwrite deals in the current market have an advantage in purchase negotiations.