Interest rates muddying multifamily market

The Marina Village Apartments in Sparks.

The Marina Village Apartments in Sparks.

After years of a “feeding frenzy” brought on by the low cost of debt, the multifamily market in Northern Nevada is teetering at the top of the roller coaster.

The voracious appetite for multifamily investment properties and white-hot pace of new multifamily development has slowed due to rising interest rates, said Gerrit Hillebrand, vice president of multifamily for Colliers.

“We are not seeing the bidding wars anymore,” Hillebrand said. “What was once competitive bidding at or above the asking price, we are now seeing several offers within the same range of 90 to 92 percent of seller’s perceived value. That’s very telling, and it’s based on the restriction put in place by available debt.

“It’s just a sign of the times – if debt service is going up and you are having less competitive bidding, it’s affecting prices across the board.”

Just a few short quarters ago, before the hike in interest rates, it was common to see more than a dozen bids come in on a multifamily investment property, and the most serious offers were always above the seller’s asking price. Today, institutional buyers are biding their time and waiting for the dust to settle, Hillebrand told NNBW.

“The trades we are seeing locally are devaluations of 8 to 15 percent depending on the product, and my counterparts in larger markets are seeing groups walk away from $1 million and $2 million earnest deposits because they would lose far more if they ended up performing at their contractual price given where the interest carry is taking them,” Hillebrand said. “They are looking at five, seven and 10-year holding periods, and if there are better deals around the corner they are walking away from those earnest deposits to keep larger amounts of equity available for better opportunities.”

Deal sponsors who package multifamily properties often aren’t getting calls back from the investment community, Hillebrand added, a trend that was unheard of even at the start of the year.

Gerrit Hillebrand

“A lot of investors are putting their pencils down and waiting for the dust to settle as we transition,” he said. “There’s a lot of guessing going on. Sellers want last year's pricing and don’t realize things have changed, but buyers are well aware because they are applying for loans and are receiving different responses than they have in the last few years.

“Since mid-February and early March I have seen several deals go sideways due to debt,” Hillebrand added.

The cooling off extends to multifamily development as well. Hillebrand said there are between 8,000 and 9,000 new multifamily doors in the development pipeline at various stages of the planning and construction process, and some of those projects likely won’t come to fruition due to uncertainty in the broader equities markets and the increasing cost of taking on debt.

“Call it hesitation or fear, but there are very sophisticated individuals exiting what looked to be like very well-positioned and well-located projects,” he said.

There’s some good news to report in the multifamily market, however. According to the Nevada State Apartment Association, the cost of renting an apartment appears to be stabilizing in the Reno-Sparks multifamily sector.

After years of double-digit increases in average rents, year-over-year rents increased just 4.1 percent in June, a significant decline from the 13.3 percent year-over-year increase set in mid 2021, the NVSAA reported.

Susy Vasquez, NVSAA interim executive director, said the tapering in rent escalation is primarily due to supply finally catching up with demand.

“Just before the pandemic, Reno-Sparks was heading into 18 months of uncertainty – we didn’t know how we were going to fill all these new apartments that were going to be released over the next 18 months because there was a lot coming onboard and there weren’t as many people moving,” Vasquez told NNBW. “But then the pandemic hit, and essentially everyone from the Bay Area and Silicon Valley moved to Reno and ate up every single one of those units.

Suzy Vasquez


“We did market a lot to those areas right when that happened,” Vasquez added. “But we are heading into another period where we have a lot of units coming online – there are 4,500 units under construction, and that is a lot for Reno-Sparks.”

Vasquez said that the leveling off in rent increases is likely to extend through the year and into 2023. Rising mortgage rates will keep many multifamily tenants in their apartments rather than purchasing single-family homes, and the significant development pipeline will continue to ease pressure on demand.

“We might be overbuilding,” Vasquez said, “but that’s not a bad thing because it means we will continue to have this normalized market. Any availability in supply will further extend single-digit (rent) growth, and vacancies will lead to lower asking rents and move-in concessions.

“Rents are stabilizing, but not for people who are currently living in apartments and have leases that are coming up for renewal,” she added. “Their rents are based on six months to a year ago, and they will be brought up to market (rates), which might be more than 4 percent.”


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