Inflation, along with other economic factors, prompted the Fed to intervene and raise the short-term interest rate in March 2022. These rate hikes eventually caused uncertainty in the market and buyer activity paused to let the rates settle and values adjust.
The impact of inflation on multifamily due diligence since 2020 has been profound, leading to market fluctuations and influencing buyer behavior. CoStar data, detailed below, shows the extreme fluctuations the multifamily market experienced from 2020 to early 2023:
- Pre-COVID-19, transactions and YoY rent growth experienced a gradual rise. From 2017 Q1 to 2020 Q1, quarterly units sold increased from 288,625 to 312,494 (0.68%/quarter). YoY rent growth ranged from 2.63% in 2017 Q1 to 2.86% in 2020 Q1, with five quarters of YoY rent growth above 3.00% in the same period.
- In response to the pandemic, The Federal Reserve lowered interest rates, achieving an effective FFR of 0.05% by April 2020. During the beginning of the pandemic, multifamily transactions subsided and rent growth decreased substantially. In 2020 Q2, YoY rent growth reached a low of 2.29%, and the trailing 1-year average quarterly transactions reached a bottom of 225,573 units sold in 2021 Q1.
- By 2020 Q4, YoY effective rent growth surged to 4.21% and continued up to 9.13% by 2022 Q1 contributing to inflation and higher costs of living but also boosting investor profits. With historically low borrowing costs and substantial rental increases, investors flocked to multifamily assets. The trailing 1-year average quarterly units sold skyrocketed from 225,573 in 2021 Q1 to 469,291 units in 2022 Q2 (21.62%/quarter!).
- To combat inflation, increasing living costs and rental expenses, the Fed initiated rate hikes on March 16th, 2022. This led to a decline in YoY rent growth from 9.13% in 2022 Q1 to 3.83% in 2023 Q1. While multifamily transaction volume initially increased in 2022 Q2, it subsequently fell sharply from 469,291 to 276,106 in 2023 Q1 (-13.72%/quarter).
These market dynamics have significantly impacted Armada’s Due Diligence department, both positively and negatively. In 2021, our team achieved record-breaking results, witnessing robust second-half activity that surpassed the first half of 2021 by a remarkable 42%. In a similar fashion to the overall multifamily market, activity declined in Q3 and Q4 of 2022, reaching the lowest level since March 2020 when the initial impact of the COVID-19 pandemic hit.
Despite the slowdown in the market, there is still a significant and increasing amount of interest from potential new clients. Our team has been fielding more phone calls over the past few weeks and the amount of OM’s has increased. This leads us to believe the 2nd half of 2023 will see a pickup compared to the trailing 4 quarters.
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