Finance  ·  Sales

Multifamily Property Sales Plummet as Sector Continues to Cool

Experts blame inflation and higher interest rates for tanking a surging market


The party could be over for the multifamily sector in commercial real estate. While the property type has maintained its crown as the most coveted asset class these past few years, a new research report indicates a distinct cooling in the sector. 

Data research firm CoStar (CSGP) found that apartment building sales have cratered to their lowest levels since 2009. At $14 billion in the first quarter of 2023, multifamily investment volumes fell 74 percent compared to the same period in 2022, the largest year-over-year decline since sales fell by 77 percent in the first quarter of 2009, during the nadir of the Global Financial Crisis (GFC). 

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The CoStar report was first published by The Wall Street Journal.  

The decline in building sales came after the sector experienced substantial activity in 2022, hot on the heels of a wave of investment activity during COVID, as investors looked to further diversify their portfolios with the asset class as a safe harbor in the storm. 

National multifamily transactions reached $184 billion in 2022, the second-highest transaction volume year on record, according to Yardi Matrix, a commercial real estate research firm. And while multifamily transaction volumes fell 17.4 percent in 2022 compared to the $223 billion transaction volume in 2021, the past two years of sales activity have been the highest ever recorded. 

Inflation has hurt the multifamily investment sector by raising the cost of operations for building owners, explained economist Joel Naroff, president of Naroff Economics — especially utility costs, labor costs, upkeep, and goods and services. 

“You don’t necessarily need to argue that the cost of operations are going to continue to rise rapidly, it’s just that they’ve become so high, so you have to build that into the price of the building,” Naroff explained. “They’ve all skyrocketed because of inflation.” 

“These are buildings where you’re looking out over an extended period of time. They’re not the type of buildings that tend to get flipped easily or quickly,” he added. 

David Auerbach, managing director at Armada ETF Advisors, a real estate investment trust, designated one culprit for the lack of multifamily investment sales in the first three months of 2023. 

“Obviously, what’s impacted the sales market is interest rates,” Auerbach said. “You’re talking about an environment where in January, a year ago, the interest rate was zero [percent]. It was free money.” 

Federal Reserve Chairman Jerome Powell has raised the benchmark federal funds rate seven times since March 2022. Most recently, on March 22, 2023, Powell brought the benchmark rate to between 4.75 percent and 5 percent. Higher interest rates increase the cost of financing new acquisitions for developers and create less incentive for banks to lend money to finance those purchases or refinance existing buildings. 

“Until we see a reset of where interest rates are, then people just don’t want to overpay,” Auerbach added. “It does have some people spooked.”  

Indeed, sources spoke with Commercial Observer in February about a palpable cooling in the sector. 

Matt Vance, Americas head of multifamily research at CBRE (CBRE), said multifamily fundamentals “abruptly began decelerating last year” as the Fed initiated higher rates to battle inflation. 

Both debt and equity have been waiting on stability,” said Vance, who added that, “Our analysis of preliminary data for December through February reveals that multifamily fundamentals in the U.S. appear to be stabilizing.” 

Vance pointed to data that shows vacancy increases slowing down between December 2022 and February 2023, after rising steadily much of last year. He also cited robust U.S. job growth that will continue to fuel housing demand across markets, and the expectation that the Fed will wind down its interest rate hikes before the year is out. 

The decline in multifamily building sales comes as an influx of rental units are coming on the market. More than 1 million new rental units are currently under construction, according to Yardi Matrix. Nationwide, the market saw roughly 325,000 new units delivered in 2022, with an additional 425,000 anticipated for 2023. 

The markets at the forefront of this predicted multifamily construction surge in 2023 include Dallas (28,000 units), Austin (20,000 units), Miami (19,000 units), Houston (17,000 units) and Phoenix (16,000 units).

Even so, this strange mix of unit volume increases and declining investment sales volumes comes at a time of skyrocketing demand for housing. 

“There is still a lack of housing inventory to satisfy the amount of demand that’s out there on the sidelines,” Auerbach said. “Number one, there’s not an affordable product out there, and number two, where interest rates and mortgage rates are, a lot of the buyers are shut out of the market.” 

Both Naroff and Auerbach noted that multifamily building sales and rental activity will be largely defined by location and area-specific intangibles rather than any broad national pattern. 

Auerbach emphasized that mortgage rates and interest rates make some areas like the Sun Belt more attractive for purchasers than New York or Chicago, while Naroff pointed to the differences in the preferences among generations — baby boomers, Gen X, millennials, zoomers — on where they want to rent and the type of buildings they’d be willing to live in. 

“What you have is the demand for product and location and the type of product supply that meets the needs and desires of two generations, and there’s not necessarily a match with some of the older housing units in terms of where they’re located and what they have in there for younger generations,” Naroff explained. 

Despite the low building sales volumes to start the year, there’s reason to be optimistic, according to Auerbach.   

“On the fundamental side, these guys are still putting up growing numbers, they are seeing rental growth,” Auerbach said. “The key right now is we’re going into spring. Spring is the prime leasing season for these rental players, and so we’re going to see very quickly what the supply-demand dynamic looks like.” 

Brian Pascus can be reached at