Transactions
As inflation cooled throughout the year, investors have slowly trickled back into the market, sensing a bottom in pricing and peak rates. Although interest rates declined around the first fed rate cut, they’ve climbed higher again with the election and the threat of tariffs. Still, buyers remain optimistic about the trajectory of the market and with 231 transactions in the 4th quarter, we’ve seen the most volume since Q2 of 2022, when the rate tightening program began. The expectation gap between seller and buyer has also narrowed as both sides have acknowledged our “higher for longer” reality, resulting in transactions at more appropriate cap rates for the current cost of funds.
Pricing
On the surface, metrics for pricing look rather flat from the third quarter and for the stretch of 2024. Price per square foot for multifamily assets averaged $480 and price per door was $403K, basically in line and slightly down from earlier in the year. That said, as has been the case throughout this cycle, the story diverges significantly when we examine residential 2-4 unit property sales and 5+ commercial multifamily sales separately. 2-4 unit building sales actually appreciated on a price per square foot basis through the year, ending at $531/sq ft in the 4th quarter while price per door was basically flat at $462K. However, pricing in larger 5+ properties continued to fall as the impact of high interest rates and resetting loans worked its way through the market. 5+ unit properties sold for an average $368/sq ft and $273K/door, down 20% and 17% respectively from their mid-2022 highs.
Metrics
In stark contrast to the relatively muted moves of the price per square foot and price per door statistics, the real change in the market is put in relief by the trends to the income metrics. Overall, GRMs ended the year at 14.9X gross rents with cap rates around 4.6%. As with previous quarters during this rate tightening cycle, there’s a huge divide that continues to widen between 2-4 unit properties nad 5+ commercial multi-family. GRM and cap rates have been basically flat for the year in the smaller properties while these income metrics have continued to feel pressure from increased rates and resetting loans in the larger properties. With GRMs ending the year at 12.1X and cap rates at 5.5% on average, we’re now down nearly 5 multiples on gross rents since the peak in Q1 of 2022 and 150 basis points (1.5%) increase to cap rates during this time, equaiting to a nearly 30% decline in values for the same amount of income.
Inventory
Active listing counts in multifamily during the last year show an interesting story. While most of the year saw significant increases to inventory counts, we had a surprise tightening of active listings in the 4th quarter, falling from 714 in October to 608 on average in December of 2024. Anecdotally, here at the brokerage we felt a pronounced increase in buyer interest and activity in the 4th quarter, first due to the change in direction of interest rates, then from the election results in November. It seems many people have decided it’s finally time to get off the sidelines and place some bets. Combine this with the feeling that cap rates have at last risen to a level more in line with interest rates and suddenly we have more willing buyers and sellers, resulting in both increased transaction volume and lower inventory. We’ll be excited to see what 2025 brings since inventory levels are higher than our 10 year average at this point, but we do seem to be establishing a new equilibrium to the market.
