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The Pulse of the Market

Over the last month there were fewer closed sales just about everywhere. The recent interest rate increases have created a drag on sales. Inventory hasn’t really increased all that much, at least as much as expected. My guess is owners are realizing that owning multifamily is a good hedge against inflation and although there’s statewide rent control, rents will continue to increase.

What to Expect

I expect current market conditions to continue for the rest of the year with very little variation. With the recent positive jobs report there are expectations we will see another three-quarter point increase in interest rates in September to try to contain inflation.

With the recent market changes and properties taking longer to sell and with more competition for investor dollars, I expect the RE/MAX Commercial Auction Program to become a lot more beneficial for sellers looking to compete in this market. This is a program that allows sellers to get both local and worldwide exposure of their property, maximize sale proceeds and do so with little or no fees. Let me know if you’d like more information on this program. 

Let's Talk About It

More than two-thirds (69%) of Americans think the nation’s economy is getting worse -- the highest that measure has reached since 2008, when it was 82%.

Southern California rents, $2,400 and climbing, surge amid booming apartment demand. Vacancy rates this spring ranged from 2.5% in Orange County to 2.7% in the Inland Empire and 3.2% in L.A. County.

U.S. Apartment Rents Expected to Continue Growth Through Year-End. Asking rent is expected to increase around 8% by year’s end, ongoing inflation and recession concerns notwithstanding.

RENT INCREASES: The tenant protection and rent control law allows landlords to raise their rents by 5% annually, plus the rate of inflation in their metropolitan area, with a maximum of a 10% hike. In past years, the total increase has hovered between 5.7% and 9%. With inflation at 9.1% this year’s increases can hit the 10% maximum.

Blackstone: Slowdown of New Construction to Keep Lifting Rents. A shortage of new home inventory, record-high prices for single-family homes and high mortgage rates will continue to push would-be home buyers into rental units.

The Mortgage Bankers Association is projecting an 18% decline in total commercial and multifamily mortgage borrowing and lending for the second half of 2022. Multifamily lending alone is expected to decrease 10%. These figures are measured in dollar volume not transactions. With increasing values, the dollar amount should be increasing. Based on these estimates you can see the anticipation for the amount of pullback from investors.

Underwriting standards have tightened across the board for all asset classes.

With the increases in interest rates, buyers will expect price adjustments to offset the increased cost of capital and lower growth projections. And sellers will likely hold on to the current cycle’s peak valuations. The buyer-seller disconnect, if it hasn’t already, could cause a substantial lull in the multifamily market.

We are seeing some downward pressure on the pricing of multifamily assets. While rising rents have led to increased NOI, we are also seeing that the rising interest rates for acquisitions are leading to lower loan to values at purchase (requiring more up-front equity) and decreased property values to get to the same returns.

Although foreclosures have been very low due to the moratoria on new foreclosures and mortgage forbearances, 35,000 individuals saw new foreclosures on the credit reports, an increase from 24,000 in the previous quarter. This potentially suggests the beginning of a return to more typical levels.

July jobs report 'scorcher' raises odds of another super-sized Fed rate hike. Traders raise odds of another Fed rate hike of 75 basis points in September.

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Mike Lembeck

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