The fog of uncertainty remains in the broader equity capital markets. With the private market transactions over the past three months, values for institutional Class A assets appear to have declined roughly 7% from their peak in late 2021 to early 2022. Values for value-add, 1980s-era and older vintages appear to be more impacted, largely due to the lack of bridge financing primarily used to acquire and renovate these assets.
With the reduction in bridge financing, financing multifamily acquisitions via banks and insurance companies has increased. This has also resulted in a maxing out at a more conservative 60% to 65% loan-to-value or loan-to-cost ratio. Cap rates are expanding and broadly settling in the 4% range across major markets, up from 2021’s low in the 3% range. The impact from expanding cap rates has started to show up in the property index of NCREIF, which tracks the performance of U.S. commercial properties including apartments: Q3 2022 returns are 1.58%, a considerable deceleration from the 8.88% posted in Q4 2021.
We have seen these cycles of lenders pulling back before. In 2015-16, new fiscal policy required additional capital reserves from banks that issued construction loans—a challenge for developers trying to secure construction financing. A similar situation emerged from May 2020 through early 2021 amid the pandemic. And we expect it to persist over the next year to 18 months as the Fed battles inflation by raising short-term borrowing rates.
This may result in fewer new apartment construction projects being started in the short-term which should help support and increase the value of existing operational properties.
Longer term, we see significant tailwinds for multifamily investment and development. The U.S. still has a shortfall of nearly 4 million multifamily and single-family units. The interim slowdown in development will exacerbate this problem. So, while we expect to see increased vacancies and concessions as we head into peak supply in mid-2023, we anticipate strong long-term demand.
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