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Good morning. The rental apartment building market is witnessing an unprecedented drop in sales, comparable to the subprime-mortgage crisis of 2008. The cause of this decline can be attributed to three factors, namely higher interest rates, regional banking issues, and sluggish rental growth.

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Apartment Building Sales Hit Rock Bottom with 74% Drop in Volume

Higher interest rates, regional banking chaos, and slow rent growth have slashed demand for rental apartment properties as sales fall at the fastest rate since the subprime mortgage crisis.

Behind the numbers: According to CoStar, investors bought $14B of apartment buildings in Q1 this year, a 74% YoY decline. This adds up to the largest annual sales decline we’ve seen since the 77% drop in Q1 2009. Not to mention that the only quarter with worse numbers since 2012 was Q2 2020 when the pandemic froze the market. This time around, systemic shocks have spooked the whole financial system, and many banks are curbing lending.

Shifting tides: The slowdown in building sales is a reversal from the record-setting transactions in late 2021 when the multifamily sector was a top performer in commercial real estate. However, the addition of 500,000 new units to the market and regional banking issues affecting the availability of multifamily loans have contributed to the current slowdown in building sales. As a result, investors and brokers do not expect a rise in sales until next year.

Tightening belts: The factors squeezing the apartment market have also made it harder to buy a home, as home prices dropped YoY in February for the first time in 11 years. Additionally, a measure from Green Street logged a sharp drop in the multifamily subsector, with buildings down 20% from their 2021 highs.

Lost time: The distress in the market could benefit tenants, but investors who purchased properties in 2021 with the goal of raising rents prior to sale are now struggling due to cooling rent growth. Annual rent growth is well below the pandemic high of 18%, and while rents have increased slightly this spring, it is not enough to reverse the downward trend.

➥ THE TAKEAWAY

Why it matters: Overall, the real estate market is experiencing a decrease in apartment building sales due to increased financing costs and rising interest rates, along with stalled or decreasing rent rates in major cities. The banking industry's upheaval has made it more challenging to purchase buildings, with lending institutions offering high-rate loans or pulling back. Although apartment-building values are currently falling, many landlords are hesitant to sell because nobody wants to take an L when they don’t have to.

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📖 Read this piece from Globest to gain insights into tax strategies for net lease properties and how to push back against exaggerated tax valuations.

🖥️ Watch Christian Ulbrich discuss how economic uncertainty and cyclical headwinds are overshadowing a positive growth trend in the CRE market this year.

🎧 Listen to Sam Byrne, managing partner and founder of CrossHarbor Capital Partners, discuss the process of helping the Yellowstone Club recover in 2009 on this episode of Capital Allocators.

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• Eye on SFR/BFR: Russ Hardy of Berkadia discusses the nuances of the single-family rental/build-for-rent model when compared to typical multifamily investments.

• Under the wire: Elat Properties has acquired a downtown LA office building for $41.9M, right before a new transfer tax would take effect, saving them $2.3M on the deal.

• Lions and royalty: Black Lion has purchased a 13.5 KSF restaurant space at Brickell SLS Miami from a family of Qatari royals for $10M.

Almost 200K jobs were added to the NY private sector in 2022. That figure adds up to 96% of the jobs lost during the pandemic, with hotels and retail largely driving the growth.