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With only 128 sales of multifamily properties in the greater South Bay, we are clearly in a period of market uncertainty as the fed-induced interest rate shock works its way through the system.  Sales in Q1 of 2023 were down 13% from the prior quarter, which was already a low volume period, but also a whopping 43% from Q1 of 2022, before the rate increase cycle began.  This was a lower transaction count than even Q2 of 2020, when the market was mostly on pause due to the emergence of Covid.


Interestingly, despite the drastic decrease to volume, prices on physical space remained relatively resilient.  Averaging $496 per square foot, sale prices were slightly above Q4 2022’s $488 and only 4.2% below 2022’s year long average of $518/foot.  Price per unit pricing mirrored these percentage changes and came in at an average of $427K per door.  Low inventory levels and the high proportion of low rate loans on existing properties are likely keeping prices from dipping more significantly.


The story behind income metrics diverges a bit from the raw price data.  Gross rent multiples on closed sales continued to decline, averaging a 17.0 GRM in Q1 of 2023.  That’s down 0.3 from the previous quarter, but 2 full multiples down from the high last set in Q1 of 2022.  Cap rates averaged 4.0%, up 40 basis points from the Q1 2022 high of 3.6%.  How is it that income metric sale price data could show more deterioration than price per square foot and price per door?  Thinking it through, the only plausible explanation is rising rents.  Income pricing on new deals is more attractive than it’s been in three years, compensating for increased borrowing costs and reduced demand.


Although income metrics certainly suggest the long awaited arrival of a buyer’s market, inventory levels contradict a forecast too far in that direction.  At 463 average active listings throughout the quarter, inventory remains flat and low with levels in a tight range going back as far as 2010.  By way of comparison, the average number of active listings in 2008 was 1780.  Isolated reasons for sales are causing the transactions we do see, but there’s no evidence of widespread distress in the local multifamily market.

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