2023 has been a different kind of year for multifamily. After several years of historic rent growth and a white-hot investment sales market, things have cooled considerably. A CoStar report noted that investment sales in the sector dropped 74% in the first quarter from one year earlier.
MFE recently got a chance to discuss the pace of investment sales with Frank Roessler, founder and CEO of Ashcroft Capital. In recent years, Ashcroft has been an active player in the transaction market, building a portfolio of 13,000 units in Florida, Georgia, North Carolina, and Texas. Roessler offers a prediction for when investment sales will pick back up, outlines why investors will remain interested in the sector over the long term, and shares Ashcroft’s current acquisition strategy.
MFE: There have been multiple reports recently detailing the dip in apartment investment sales. How do you see the pace of transactions unfolding over the rest of 2023?
Roessler: I don’t see transactions picking up significantly for another 18 to 24 months.
It’s obviously no secret what has caused all of this. Rising interest rates and the accompanying volatility in the debt markets have severely pumped the brakes on investment sales. Cap rates have risen, and multifamily values have declined correspondingly. Debt is largely unavailable, except for agency debt at lower leverage. Spiraling insurance costs and the potential impact a recession could have on property performance are perhaps giving some buyers second thoughts as well. With the higher cost of debt and subdued projected growth, buyers need to pay less to hit their desired returns. Put all these factors together, and you have, broadly speaking, a sizable gap between what sellers want and what buyers are willing to pay.
Once we get more certainty about the outlook on interest rates and anxieties about the overall economy ease, investment sales will start to pick up. But it’s anyone’s guess when that happens to a significant degree. And there’s a good argument to be made that pricing won’t return to its previous sky-high levels when the pace of sales increases.
MFE: Do you see any trend in the kinds of properties that are on the market in the current climate?
Roessler: Yes, the bid-ask spread is tighter for high-quality product in well-located submarkets. People still want good communities. But for B and C product, there is a much bigger imbalance between what sellers are seeking and what buyers are willing to pay. Therefore, there is less of that product on the market.
MFE: Do you see any reason to believe that there will be a long-term dip in investor interest in multifamily properties?
Roessler: I think multifamily is poised to attract strong investor interest over the long term. Whether we’re going through a rent-growth plateau or even a slight decline, the fundamentals still remain very strong compared with other asset classes.
In addition, the current cost of buying a home in a time of higher interest rates will support apartment demand, and the impact of a recession on renter demand could be relatively minimal. Generally speaking, companies have strong balance sheets, which should minimize layoffs during a downturn.
MFE: What is Ashcroft's current acquisition strategy?
Roessler: We’re focused on good product. We haven’t acquired a community this year, but that doesn’t mean we aren’t looking for the right fit. The current climate can create opportunities for disciplined buyers with the ability to scour the markets and wait for the right property to come along. We don’t attempt to play real estate cycles. However, we do believe the next 12 to 18 months could present interesting opportunities in our target markets throughout the Sun Belt.
