I hope this email finds you in great spirits and that your long holiday weekend was nothing short of amazing! This month, we will look at sales velocity. As expected, sales velocity fell off the cliff in the first quarter of 2023. At the risk of coming across as Captain Obvious, I will share some numbers and some thoughts.
As always, I'm here to try to bring you some clarity in our murky and ever-evolving multifamily investment market. Today, we're going to delve into a significant development that has caught no one by surprise: the striking drop in sales volume for apartment complexes from the 1st quarter of 2022 compared to the 1st quarter of 2023.
I have read many reports on the multifamily investment sales market from a national perspective. Depending on which report you read, sales volume is down anywhere from 60% to 65% this year over the same period last year. As someone who is active in south Mississippi and south Alabama, I wanted to look at this from a regional perspective.
For the purposes of this report, I only considered properties in south Alabama and south Mississippi with 20 units or more. In the first quarter of 2022, our market was bustling with a total of 26 transactions for apartment complexes. Fast forward to the same period in 2023, and we were not shocked to witness a dramatic decline, with only 8 transactions taking place (a notable 69% decrease in sales velocity, and slightly more than the national decline).
Last year in Q1, Alabama’s velocity outpaced Mississippi’s velocity by a little more than 2 to 1. This year’s Q1 is evenly divided between the 2 markets. Consequently, Alabama is seeing a 78% decline between last year and this year and Mississippi is seeing a 50% decline. I would not read anything into that except that the south Alabama market is typically more robust than the south Mississippi market.
Here is where I risk coming across like Captain Obvious. Let’s briefly discuss the factors at play that have led us here:
Higher Interest Rates: The prime interest rate was 3.5% in the first quarter of last year. This meant you could easily buy a multifamily investment property at a 5% or 6% cap rate and achieve positive leverage. Today, the prime interest rate is 8.25%. Transaction velocity is likely to remain subdued until values have adjusted to the higher rates. I don’t see this happening before the 4th quarter of this year or Q1 of 2024.
Cost of Insurance: The cost of insurance has eaten into the Net Operating Incomes so deep that value has been eroded temporarily. This is not sustainable. After the insurance companies make more record profits this year, we anticipate that more companies will jump into the market and create more supply and a more competitive environment.
Despite this downward trend, it's essential to view these changes through a wider lens. Real estate markets are cyclical, and fluctuations are a natural part of the industry. Whether we are at a point in the cycle where values are rising, or we are at a place where values are declining, all I can be sure of is that it will change. We think that the market, and sales volume, will be better in the first quarter of 2024.
So, what does this mean for you? If you are considering selling, cashing out and retiring, we are recommending you hold on for another 9 to 12 months. On the other hand, if you are considering selling and exchanging into a bigger, better investment, or different property type, it doesn’t really matter because you would be buying in the same market that you are selling in. And that is true in any market, good or bad.
Recognizing market trends and understanding the factors driving them allows you to make more informed decisions. In our upcoming updates, we'll continue to monitor the multifamily investment market closely, providing you with timely updates and valuable insights.
If you have any questions, concerns, or simply want to chat about the market, don't hesitate to reach out. I'm always available to discuss and assist you in any way I can.
Until next time, stay positive, stay informed, and keep moving forward!
May 2023 Average Expenses
Last month we took a deep dive into effective rents along the MS Gulf Coast and the insane cost of insurance this year. In this update we will examine the average expenses by category, and as promised, we are adding south Alabama data to our report.
Why is this critical? Over half of the $2.9 trillion of outstanding commercial mortgages are maturing in the next 2 years. Many of these loans were last refinanced 3 to 5 years ago. The prime interest rate in June of 2018 was 5% and in June of 2020 it was 3.25%. Today it sits at 8.25%. Your lender, and loan docs/covenants, require you to maintain a minimum Debt Coverage Ratio (NOI/Debt Service = DCR). The cost of insurance has increased by an average of 99.46% so far this year which is having a significant negative impact on NOI. This combined with higher mortgage payments could be the proverbial perfect storm that could cause you to have to bring more equity to the table when refinancing. Most lenders require a 1.25 DCR.
Because of this, we are meeting with owners and conducting an analysis of their current DCR and, more importantly, what the DCR will be based on current interest rates and the loan balance at maturity. Then we are helping them develop a plan to mitigate the impact of the out-of-control insurance costs combined with rising interest rates. At the very least, we want to remove the stress and surprise elements from the equation and, in the best case, eliminate the need for them to bring more equity to the table or to be forced to sell in a down market.
Before I share the expense data, I have to say that typing the above words was painful. That is because I am an optimist and that felt so negative. The late great Zig Ziglar used to claim that he was so optimistic, that he would “go after Moby Dick in a rowboat and take the tartar sauce with him.” I can relate to that. I know that it is going to get better. The top insurance professionals tell me that these high rates are not permanent, and we should begin to see them deflate in the next 9 to 12 months. I am also optimistic that the prime interest rate will drop to the low to mid sixes in the next 12 to 18 months. So, for most owners who are interested in selling now, our advice (except in rare instances) is to hold on for 9 to 15 months and they should do much better.
It is now more important than ever to make sure you are paying attention to the expense side of the ledger. For example, I have had success getting property taxes reduced simply by showing the tax assessor’s office similar properties in the area with much lower taxes. And it is so easy to find out what other owners are paying in taxes online. I bring up taxes because that is the expense that seems to have the most variance from property to property.
The below expenses are from calendar year 2022. I have not included payroll and related expenses because they vary so much by size of portfolio. Nor have I included management fees as many properties are self-managed and the numbers would skewed and of little value. It should also be noted that the cost of insurance is up 99.46% in the first 4 months of this year on average.
Mobile/Daphne MSA Average Expenses
Operating & Maintenance
Utilities (common areas)
Gulfport/Biloxi/Pascagoula MSA Average Expenses
Operating & Maintenance
Utilities (common areas)
If you would like a complimentary loan and DCR analysis, or if we can be of any help, please don’t hesitate to contact me by phone or email.
Thank you for taking the time to read this edition of our Multifamily Market Minute. We welcome your comments, questions, or future topic ideas. Feel free to forward this to anyone who you feel may be interested in this information. The Molyneaux Group exists to help real estate investors maximize their investment returns while minimizing their risk.
April 2023 Insurance
The number one issue facing apartment owners along the Gulf Coast right now is the rising cost of insurance. We are seeing renewal quotes ranging from $1,500 per unit to as high as $4,000 per unit depending on the age of the buildings and distance from the coast. The problem is that so many insurance companies have pulled out of the market that there is very limited capacity (supply), and the number of properties (demand), significantly exceeds that capacity. To make matters worse, the older your property, the fewer the companies that will quote it, and the higher the premium will be.
Here are a couple of guidelines to help you prepare for your renewal:
If your property was built 2015 or later, congratulations! This seems to be the sweet spot and you will have more options. Budget 1.5 to 2 percent of replacement costs for your annual premium. I should mention that they are calculating replacement costs at $130 to $140 per square foot. This means you could see premiums between $1,600 and $2,400 per unit.
At the other end of the spectrum, if your property was built between 1980 and 1995, you should budget between 2.25 and 2.5 percent of replacement value. This means you could see annual premiums between $2,500 and $3,000 per unit.
As you know, there are a lot of other factors that go into it, and I am not an insurance broker. I am just a commercial real estate investment broker who sells a lot of apartment properties and I am sharing what I am seeing in the market.
It is now more important than ever to make sure you are maximizing your effective rents. More than 80% of the properties I analyze have below market rents. We have seen double digit increases in rents along the MS Gulf Coast each of the past 2 years. During the past 12 months alone, average effective rents have increased by 14.04%. Below are some statistics for the MS Gulf Coast as of February, 2023. We will be adding South Alabama stats in the coming few months so don’t go away.
Average Eff. Rent
Average Eff. Rent PSF
Here is a breakdown by the property’s age.
Average Eff. Rent
Average Eff. Rent PSF
In addition to making sure their rents are at market or better, many of the owners we work with are eliminating their debt, when possible, and self-insuring for wind. Let’s face it, with deductibles so high, you will likely be replacing your own roofs even if you are insured for wind.
Thank you for taking the time to read our first Multifamily Market Minute. We welcome your comments, questions, or future topic ideas. Feel free to forward this to anyone who you feel may be interested in this information. The Molyneaux Group exists to help real estate investors maximize their investment returns while minimizing their risk.