July 2023 Sales Velocity

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:

1. 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 4^th quarter of this year or Q1 of 2024.
2. 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!