Speakers on the investment sales panel at the annual InterFace Multifamily Southeast conference were overall bullish on the sector’s investment prospects in the new year. The event, now in its 15th year, was held on Wednesday, Dec. 4 at the Cobb Galleria Centre in Atlanta.
To kick off the panel, moderator Paul Berry, president and COO of Mesa Capital Partners, discussed what a recovery could look like in terms of investment sales volume.
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Berry said that in the six years leading up to the onset of the COVID-19 pandemic, annual U.S. multifamily investment sales volume hovered between $155 billion to $195 billion per year. He noted that due to robust inventory growth during that time, a “normal” yearly sales total would average out to $180 billion to $190 billion.
“2021 saw ‘double normal’ — it was $350.7 billion,” said Berry. “The first three quarters of 2022 were at that same level before it slowed down by the end of the year, but it still eclipsed $300 billion.”
He added that 2023 investment sales volume was between $115 billion to $120 billion, and this year is on track to improve slightly but still land around $130 billion, well below the pre-pandemic average. If this trend holds, then the years between 2021 and 2024 will average out to $225 billion in multifamily investment sales.
For 2025, Berry said that a return to normalcy would be aided by a combination of developers continuing to deliver assets, sellers being motivated to willing to meet prospective buyers in the middle and the capital markets being able to offer attractive debt.
Has the Market Bottomed Out?
Berry’s first question posed to the panelists was whether or not the multifamily market had reached the trough in terms of valuations. Because of the robust amount of new supply that has come on line — 588,000 units in the past 12 months, according to data from RealPage — absorption has been outpaced by deliveries recently. In fact, the third quarter saw the first vacancy rate decline in over two years, according to research from CBRE.
Brian Grant, senior vice president of acquisitions at EQR (Equity Residential), said that the market still has plenty of appeal for investors despite uncertainty in the property fundamentals and volatility in the capital markets.
“I don’t know where the bottom is or was, but there are opportunities no matter where you are in the cycle,” said Grant.
All panelists noted at one point or another how anomalous the years 2021 and 2022 were for the multifamily sector due to record low interest rates and strong property fundamentals — including double-digit rent growth, which prompted a frothy investment and development market that is still playing out to this day. Patrick Chesser, Mill Creek Residential’s senior managing director of development, joked that the firm has to basically exclude those years in terms of comps.
“When we show sales comps to our investment committee, you almost have to take two years and block them out,” said Chesser. “So it’s anything pre-2021 or post-2022.”
Seth Greenberg, CEO and COO of ECI Group LLC, said that his firm remains optimistic on the sector as a whole, especially in the Southeast because of the job growth and in-migration in the region’s top markets.
“The trough discourse is not driving our decision making,” said Greenberg. “We like the replacement cost story, we like the rent growth story and we like that expenses have flattened out and can’t get much worse. The [Southeast multifamily] story is bright; it’s just a matter of when.”
Panelist John Leonard, first vice president and regional manager at Marcus & Millichap’s Atlanta office, would certainly like to know when investment sales activity will return in earnest. He said that his firm has been very busy producing brokers opinions of value (BOVs) for their owner clients, which is a crucial determinant for sellers in deciding whether to market their asset for sale or hold it for a longer duration. BOVs are tools for owners to see where the market stands and what they can do to boost net operating income at their properties in the interim.
“Our Institutional Property Advisors division probably did 250 BOVs this year,” said Leonard. “They’re working harder than ever and not making any money. But it’s about keeping the owner informed and positioning them to sell, whether that is in 2025 or into first-quarter 2026.”
Leonard also opined that the U.S. multifamily market has not fully bottomed out yet due in part to banks.
“Banks have to get realistic of what the value is and whether they’re going to take the property back or foreclose,” said Leonard. “That has not happened yet, but I think it will happen.”
Berry said that according to the Green Street Commercial Property Price Index (CPPI), which is a real-time measure of property values, U.S. multifamily prices remain above pre-pandemic levels. He said that the CPPI was at 100 in 2017 and is at 152 today.
“So in essence, if you bought a property in 2017 you would be 52 percent above where that value was then,” said Berry.
He noted that the CPPI for U.S. multifamily peaked in early 2022 and fell by 30 percent by late 2023 before rebounding this year to just 20 percent below that peak, suggesting that maybe the bottom of the market has been reached.
Greenberg pointed out that almost all owners now are offering at least one month of free rent as a concession to new renters. He posited that once the multifamily market comes back to a healthy equilibrium, those concessions should disappear and will automatically boost revenues for owners.
Ringing in the New Year
Greenberg said that ECI plans to build one or two suburban multifamily properties in the new year as well as sell a few assets. He said the company also plans to acquire 1,500 units, primarily in Florida, Nashville, Raleigh, Charlotte and Texas.
“It’s going to be busy, but we’re excited,” said Greenberg. “We’re long on Southeast multifamily.”
Grant said that EQR currently has 14 properties in Atlanta and wants to grow that figure to 30, despite Atlanta being the “worst performing market” where it owns at least 8,000 apartments.
“We’re extremely bullish on the market’s long-term growth, the quality of jobs here and the transformation of many suburban locations with town centers and walkability,” said Grant.
He added that the firm has been monitoring the supply-demand dynamics in Raleigh-Durham and Charlotte. The Charlotte market is particularly interesting — many panelists throughout the conference noted that the metro area’s current development pipeline represents 10 percent of its overall inventory.
“We think the supply story has to play out a little bit,” said Grant. “I can see EQR some time next year entering Charlotte and Raleigh-Durham.”
One of the more prolific developers in the Southeast region the past few years has been Mill Creek Residential. Chesser said that the South Florida-based developer has 15,000 units in the pipeline in regions home to “smile states” — the Southeast, Southwest, Mid-Atlantic, Texas and California — including 1,000 to 1,200 units in the Atlanta area that will deliver in 2025 and 2026. He added that Mill Creek is currently waiting out values to be able to sell at a comfortable margin.
“Fortunately, we have very patient capital and we have the option to do that on certain deals,” said Chesser. “We want to make $30,000 to $40,000 a door, which is not a screamer compared to COVID standards of $100,000-plus; that’s not reality. We’re classic general partners, we don’t want to get buried in preferred equity. We want to sell at a profit when we can.”
The panelists concurred that the most likely sellers in 2025 will be merchant builders seeking to recycle cash, owners with investment funds that are nearing retirement and owners with loan maturities coming up.
— John Nelson