Apartment sales fell to near their lowest in a decade in the first quarter, eliminating property purchases at some publicly traded landlords as buyer reluctance at a time of elevated interest rates is combined with unbending owners waiting for strong fundamentals to prop up prices.
The first quarter’s $16 billion in transactions was just $2.5 billion over the pandemic-era low of $13.5 billion and represents an 86% drop from the era’s peak in the final quarter of 2021, according to CoStar data.
“Transaction activity has been quiet,” Eric Bolton, Mid-America Apartment Communities’ chief executive, said on the company’s first-quarter earnings call. “I think the difficulty has been that the volatility in interest rates has really slowed the market down.”
The low sales volume was heard loud and clear as companies, including MAA, AvalonBay, UDR and Equity Residential all had zero acquisition activity in the first quarter, despite what Mark Parrell, Equity’s CEO, said was an industry-wide pool of more than $200 billion looking to invest mostly in apartments.
“Right now, we continue to see a lot of product offered,” Parrell said, “but there is still a big difference between seller and buyer expectations,” the bid-ask spread, that is tempering the number of deals and keeping dollars on the sidelines that executives remain eager to spend.
AvalonBay reported having $288 million in unrestricted cash and full access to $2.25 billion in credit it said could be used for acquisitions.
“We continue to preserve dry powder on our balance sheet so that we will be in a position to take advantage of future opportunities that may emerge,” Matthew Birenbaum, chief investment officer at AvalonBay, said on the company’s earnings call.
Joseph Fisher, chief financial officer at UDR, said the company was sitting on nearly $1 billion in liquidity at the end of the quarter, “so we’re able to kind of sit back and be in the capital environment and wait to pivot to offense,” he said on the company’s call.
MAA Finds Deal
There are signs, however, that investors may soon be able to enter the playing field.
Fisher pointed out that the transaction market “was finding its footing” as buyers and sellers seek to agree on pricing while the Federal Reserve's delays in cutting interest rates have led to some uncertainty. Still, MAA is set to close on its first acquisition of the year with an off-market deal for a newly constructed, 306-unit property in a Raleigh, North Carolina, suburb for roughly $81 million.
AvalonBay is likewise actively looking for deals on newer assets built in the past decade trading at 15% to 20% below replacement costs in the Sun Belt, where supply factors have decreased values.
On the earnings calls, executives said they believe interest rates will remain relatively high for an extended period, putting an end date on supply-driven declines in property valuations.
“The high level of supply that we are seeing today is partly a result of cheap financing that’s been available over the last couple of years,” said Bradley Hill, MAA’s chief financial officer. “In general, those times are behind us.”
Along with the drop in sales, per-unit costs have fallen 8.5% over the past year and 17% from highs in 2022, according to CoStar data. But executives across the board have likewise reported strong fundamentals, including high rates of move-ins relative to move-outs, significant occupancy, better-than-expected job and wage growth, positive migration trends, and an expensive mortgage market that has led to what MAA and AvalonBay both said was the lowest number on record of tenants moving out to buy a home.
Future Value Focus
Taken together, those metrics have convinced some executives that the current downturn is temporary — particularly given the slowdown in construction starts — and that owned assets have a higher future value than the current market would suggest. Unless otherwise forced to sell, some lenders, owners and merchant developers appear willing to ride out current disruptions.
According to Hill, 85% of loans that came due in 2023 were extended, and new construction loans are often receiving terms stretching to four and even five years, with optional extensions of up to two years if borrowers meet certain criteria.
“There’s been a change in how [lenders] have approached their construction lending,” he said, “and the term that they’re able to get in their construction loans now is longer than I’ve ever seen before.”
It’s an assurance that Bolton says is fueled by the strong demand fundamentals in the multifamily sector. Coming out of the Great Recession, MAA purchased 9,000 apartments between 2008 and 2009.
The difference between now and then, he said, relates to the effect on demand.
“Anytime you have an environment where the demand is really negatively impacted, that can really create some distress,” Bolton said, referring to the recession that followed the Great Recession. “We just haven’t seen that play out this time. Demand has remained very strong. And I think that has bolstered confidence among a lot of merchant builders and banks to have the ability to sort of hang in there.”