How One Firm is Navigating Multifamily’s Bid-Ask Impasse
On paper multifamily fundamentals are fine. In reality the asset class is overshadowed by the uncertainty of the cost of debt, rising inflation and a potential recession that could cause rent growth to moderate.
Not surprisingly, closing deals in this environment has been tough, especially with a bid-ask spread that has become a hindrance in negotiations, says Ari Abramson, vice president of Multifamily Acquisitions for Continental Realty Corp.
“In the summer we thought the markets would stabilize and post Labor Day the floodgates would open for deals. That did not happen. Sellers have become hesitant about valuations and the 10-year Treasury has become very volatile. It is very hard to know where to lock a fixed interest rate for any type of debt instrument.”
Still, Continental Realty has successfully negotiated acquisitions in this environment. “We have found that despite the bid-ask spread sellers are opting to sell off market versus a marketing process,” Abramson says. “We have been able to make some strategic acquisitions with positive outcomes this way.”
Continental Realty has its own concerns about valuations and one way it navigates that is by pursuing loan assumption opportunities. “It allows us to know our capital structure and assume a loan that is at a more attractive interest rate than the current market rates today,” Abramson says.
Unfortunately, he adds, there are limited loan assumption opportunities on the market.
The unknown cost of debt and its effect on cap rates also is impacting valuations, he notes. But it is safe to say that cap rates will be bifurcated as these trends continue.
“Cap rate expansion will be bifurcated based on vintage and renter profile. Properties that have lower in-place renter qualifications may experience a high probability of bad debt and increased vacancy as inflation will impact these residents. Class A properties, which naturally have a renter profile four-to-five times rent to income, should benefit from longer resident tenure as employment remains remote and home purchases have become increasingly challenging due to inventory and mortgage rates.”
These are not easy issues to work through, Abramson says, but ultimately he sees them as short-term problems.
“In the long-term multifamily is one of the best investments in the market serving as an inflation hedge.”