In March, we observed that notices of trust sales were beginning to hit the market after months of speculation about inevitable distress as one of the top three CRE trends in Greater Phoenix. The latest data points from Real Capital Analytics support the reason for concern: U.S. apartment transactions are at their lowest level since the pandemic. “In Q1 2024, approximately 1,040 apartment properties were traded for $20.6 billion in value. Overall quarterly sales volume was down 25% from Q1 2023, and the number of properties traded for the same period was down 26%.”
Of course, these are national figures, and Phoenix has its own dynamics. In fact, the largest multifamily transaction of the year just closed: The Carter, a 365-unit luxury apartment community in downtown Scottsdale, sold for $161.4 million in cash. Our on-site observations indicate that properties are selling at a slow but reasonable pace, but at discounts of 19-20% from late 2021 or early 2022 prices, including Class A, B and C properties.
Inflation and other pressures on the multifamily market
Like other commercial properties, multifamily properties are feeling the effects of persistently high interest rates to some degree. Rising interest rates not only increase investors' mortgage payments, but also make it more difficult to generate cash flow and overall income, which can put downward pressure on valuations. Given that the Federal Reserve's benchmark interest rate is at a 23-year high and still well above the Fed's 2% inflation target, previous statements about multiple interest rate cuts now seem overly optimistic.
Relatedly, Starwood Real Estate Income Trust recently announced it would limit investors' monthly withdrawals to 0.33% of their net assets (previous limit was 2%). About 48% of the REIT's holdings are market-rate apartments, which is one of the reasons for its “capital crunch.” In a May shareholder letter, the company said, “Given the limited volume and what we believe to be a market near the bottom, and given our belief that the real estate market will improve, we do not currently recommend aggressively selling real estate assets.” More recently, Starwood Capital Group Chairman and CEO Barry Sternright told CNBC he expects the restrictions to last about six months, and while he criticized the Fed's policies, he said, “Spreads are tightening, which means the market is recovering and the future is becoming clearer.”
Sternlicht also argued that the measure was designed to protect the 80% of investors who never redeemed their shares. If nothing else, it's an intriguing sign that a significant number of investors may not want to hold on at this point, and it will be instructive to see if other multifamily-focused REITs follow suit.
Is it time to explore multifamily opportunities?
For multifamily investors looking for a ray of hope, the current environment in Silicon Valley presents an interesting time to purchase quality assets while recognizing that multifamily's woes are not over yet. For more information on multifamily investing, contact the ROI Properties team. [email protected] or call 602-319-1326.
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