Multifamily Investments: First Half of 2022 Proving to be Most Active Year Since Pandemic
Over the past two years, a common perception has been that there is little to no inventory of available multifamily properties on the market in the Central Valley. If you compare the volume of transactions year over year to 2019 (the year preceding Covid), that perception is proven true. The pandemic year, 2020, saw a reduction in total sales transactions in the Central Valley by 18.1% compared to 2019. Last year saw an even further reduction in transaction volume, down 26.3% from 2019. This downward trend has reversed itself so far in 2022. During the first half of this year, Central Valley multi-family transaction volume is 51.1% higher when compared to the same period in 2021.
Here are some of the economic factors we have been tracking that further explain this trend:
- Inflation has surpassed a 40-year high and has been accelerating faster than anyone could have expected
- The Fed has been slow to react, and they are now playing catch-up
- Much of this volume is hang over as many buyers were able to lock in interest rates before increases.
- Lenders have adjusted quickly to the Feds’ actions by raising interest rates and taking a more conservative approach
- As the cost of funds rises, asking prices are increasingly more difficult for investors to reach
- Looming fears of a potential recession in 2024
The Impact of the Fed
The Federal Reserve increased its benchmark rate 0.25% in March, another 0.50% in May, and another 0.75% in June, with even more rate hikes projected over the course of 2022. New market data is suggesting that inflation is coming in hotter and proving more stubborn than policymakers had hoped. Lenders throughout the country have quickly adjusted to these rate hikes and have dramatically increased interest rates from 3.3% in late 2021 to over 5.45% currently.
Market value has started to moderate slightly because of these rate adjustments, however, there is still an extreme amount of capital looking to be deployed that will help maintain robust buyer activity and demand through the end of the year. Multifamily fundamentals are still strong, with favorable migration trends, high household formation, and solid wage growth contributing to continued demand.
Central Valley a Hot Spot for Investments
The Central Valley has enjoyed surging demand as investors look for markets experiencing high year over year rent growth. Among tertiary markets across the county, the Central Valley ranks seventh highest for year over year rent growth at 16.5% and average market rent now stands at $1,490 per month. Since the start of 2020, Fresno rent growth has increased 23.7% while Visalia saw the largest increase in the Central Valley over that same period of 39.3%. Average rents now exceed their pre-pandemic level. Moving forward it is expected that the economy and the multifamily industry will continue this growth pattern, but at a more moderate pace.
Many owners have already taken advantage of investor demand, but as more owners convert into sellers, bidder pools will reduce due to the increase in available properties for sale. Sellers will experience downward pressure in values as interest rate volatility will impact pricing moving through the end of 2022, we have already seen a 13% reduction in value since January 2022.
Amid all the noise, the key to success will still be thoughtful market insight and investment strategy.
Dustin Ilic, CCIM is a Multi-Family Investment Advisor with the Visintainer Group in Fresno, CA. Formed in 2018 and built on a foundation of investment real estate, the Visintainer Group is a client-first commercial real estate firm. The Group has executed over $570 million in transactions across the United States. Dustin specializes in multi-family property acquisitions and dispositions for owners in the Central Valley and Central Coast markets. He can be reached at 559.890.0319 or [email protected]