There were a total of 8 properties sold in March 2023 for a total volume of $28.049M. The market felt the “Dragon’s” movements again as the large investor traded two of their smaller assets on Heulu St. and Cleghorn St. for a 40 unit acquisition on Ernest St. for $10.25M. The average CAP rate of the March 2023 sales was 3.82% and the median price per unit was $238K. Download the market comps below!
Market velocity is down 16.16% when comparing Q1 2022 totals sales volume ($53.176M) to Q1 2023 total sales volume ($44.580M). The median price per unit is also down 20.57% from 2022 ($299K/unit) to 2023 ($238K/unit).
On the supply side of the equation, there are currently 39 properties of (5+) units actively listed on the market. The average days on market is 96 days and the longest listed property has been listed for 294 days. The average CAP rate for these listings is 3.46%
The data confirms that the market is facing its challenges due to macro-economic forces such as bank failures and the 10th consecutive rate increase by the Federal Reserve. As the cost of capital continues to rise, investors will seek discounts in pricing to achieve their desired rate of return.
The graphic below details the cumulative change in the fed funds rate since the start of the initial rate increase. Not only has the rate increased 5.0%, it has happened in a very short period of time relative to previous rate movements.
Below is a graphic that shows the magnitude of the bank failures that have occurred in 2023. There were only 3 institutions that have collapsed with assets totaling $552.3 billion. Put into context, that is $17.9 billion more in assets than 165 banks that failed in 2008 & 2009 combined. There are rumblings that the banking sector has yet to stabilize and more banks are in danger of collapsing, this will be something to keep an eye on going forward.
Many of the multifamily owners that I’ve been meeting with have shared expense ratios that are relatively high, compared to healthy, well operated assets. A property’s expense ratio can be calculated by taking the total gross revenue divided by the total operating expenses. These owners are struggling to control expenses due to rising costs in insurance, real property tax, utilities, repairs, etc. They are also struggling to keep rents in line with the market without making both cosmetic and larger capital repairs to the units and property at large. An expense ratio of between 25% - 35% suggests that the asset is being operated well and is profitable. If the property’s expense ratio exceeds 35% it’s best to take a hard look at how you can improve the operations and profitability of the asset.
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