Dive Brief:

• Higher borrowing costs are continuing to make it harder for apartment buyers to underwrite new properties, which is showing up in the transaction market.
• Apartment transactions fell by double digits for the second consecutive month in October, plummeting 52% year over year to $14.8 billion, according to a new report from MSCI Real Assets shared with Multifamily Dive.
• Prices are also beginning to erode. The Real Capital Analytics Commercial Property Price Indices for apartment assets rose 11.3% YOY, though it fell relative to September, according to the MSCI report. The annualized month-over-month decline of 7% was larger than other property types.

Dive Insight:

MSCI is only one of the sources pointing to a slowing apartment sales market this fall. 

Lending for apartments decreased by 16% year over year in the third quarter, according to the Mortgage Bankers Association’s Quarterly Index of Commercial/Multifamily Mortgage Bankers Originations. Originations fell 12% compared to the second quarter.

Part of the problem is that investors aren’t able to access the leverage necessary to get deals done, according to one apartment executive.

“Sellers aren’t willing to sell at the cap rates that allow us to get the leverage,” said Matt Ferrari, co-chief investment officer and head of acquisitions and East Coast asset management for Los Angeles-based TruAmerica Multifamily.

Interest rate volatility

The transaction situation probably won’t get better until there is some stability in the interest rate markets, according to Kyle Draeger, senior managing director of multifamily debt and structured finance at CBRE Capital Markets.

“Everybody just needs to know what the rules of the road are,” Draeger said. “And nobody knows what those will be until the Fed stops raising rates. Once you get stability and once the Fed says they're going to take their foot off the gas, you can get an understanding of where interest rates are going to be.”

Despite the slowdown in property sales and erosion in values, commercial mortgage-backed securities’ special servicing rate for apartments fell 22 basis points to 1.65% in October, according to Trepp data. The delinquency rate dropped eight BPS to 0.85%. CMBS loans, which are grouped together and packaged into bonds sold to investors, are only one form of financing used by apartment borrowers.

Still, some investors expect to see an increase in distressed properties hitting the market later next year or the year after. Joe Stampone, the managing partner of investments with New York City-based owner Atlas Real Estate Partners, said the company’s focus is preparing to take advantage of “modest'' distressed opportunities.

“It’s really about establishing strong capital partners and having discretionary capital at our disposal to go after opportunities aggressively when and if they do arise,” Stampone said.

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