Despite leading the commercial real estate sector in volume, apartment sales experienced a significant decline in May, dropping 44% year-over-year to $6.7 billion. This sharp decline, as reported by MSCI Real Assets and shared with Multifamily Dive, marks the steepest monthly drop this year. Both individual assets and portfolios suffered, with individual assets falling 40% to $4.6 billion and portfolios plummeting 60% to $2.5 billion.
The decline in sales reflects a broader trend in the multifamily sector, where property prices have been falling for over a year. According to the Real Capital Analytics Commercial Property Price Indices, prices dipped by 1.0% in May, contributing to a cumulative decline of over 20% since peaking in July 2022.
Sector-Specific Insights
Mid- and high-rise apartment transactions were hit the hardest, falling 60% to $2.5 billion, while sales of garden properties saw a 26% decline to $4.3 billion. These sluggish sales figures suggest that many buyers are still waiting for more favorable market conditions. However, some investors are seeing the current environment as a prime opportunity to make strategic acquisitions.
Matt Sharp, co-founder of Hamilton Point Investments, believes this period offers the best buying opportunity since 2010 and 2011. “There are so many markets — Houston is a good example — where the population growth is still extraordinary, but development outpaced it,” Sharp observed. In these markets, the surge in development has led to increased rents and occupancies, forcing developers of newly built projects to offer concessions and, in some cases, sell at lower prices.
Capitalizing on Current Market Conditions
Sharp sees particular promise in acquiring new construction at low replacement costs in markets experiencing strong population growth. “Brand new construction at low replacement costs in markets like that is where we see and love the opportunities,” he said. He anticipates that the buying window for these new projects will remain open throughout the year, even though he does not expect a dramatic decline in interest rates.
“We’re thinking things stabilize a little bit and the market adjusts to these interest rates, which fall to a five-year fixed rate at 5.75%,” Sharp said. “That was 3.75% two years ago, and it was 6.75% a year ago. But there is a great buying window right now because there are sellers that need to sell, especially new construction.”
Strategic Outlook for Investors
For investors, the current landscape presents a unique blend of challenges and opportunities. The sharp decline in apartment sales and property prices over the past year might seem discouraging at first glance. However, the underlying market dynamics reveal significant opportunities for those willing to navigate the complexities of the current economic environment.
Investors should focus on markets with robust population growth and overbuilt conditions, such as Houston, where the imbalance between supply and demand creates potential for attractive acquisitions at reduced prices. The key is to identify properties with low replacement costs and strong long-term growth prospects.
While waiting for a potential stabilization of interest rates, which are expected to settle around 5.75% for a five-year fixed rate, investors can leverage the current buying window to secure properties from motivated sellers, particularly those involved in new construction.
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