In mid-September the 10-year treasury hit a low of 3.62%, its lowest point during the previous two years.
What happened as a result?
Well, first-off, apartment transactions started getting inked – quickly. Sellers and buyers finally spoke a common underwriting and pricing language, and liquidity took shape in the Pacific Northwest.
What happened since that time?
A massive change in the interest rate environment. A historic election. And a reversion to market dislocation.
During this time, we learned 3 important lessons about the future.
Lesson #1
Positive leverage went out the window.
Sorta.
Since summer-2022 when interest rates began to run, nearly every buyer chanted the mantra of “positive leverage” to the point of it reaching nearly biblical status.
When the 10-year treasury dropped to a sub-4% level this mantra went out the window in favor of trying to get deals done.
Buyers tipped their hats that some negative leverage was sustainable in their underwriting and signaled that excitement to get a deal done trumped the need for day-1 positive leverage.
Lesson #2
Buying on replacement costs – or better said “a discount to replacement cost”, came into vogue.
Buying on a thesis of discount to replacement cost was previously as blasphemous as negative leverage.
However, as interest rates dropped – alerting the market of a turn-around in Federal Reserve rate policy – buyers showed up en masse to beat the clock on a market run-up and cumulatively decided that this once verboten market metric made sense.
By early-October I coined the term “$400,000/door is the new $300,000/door.”
With the recent interest rate spike, today’s pricing is hard to peg, yet buyers showed they have another arrow in their buying quiver that they are prepared to use.
Lesson #3
Aggressive underwriting returned.
As buyers returned to the market, deals got inked, and anxious buyers lost properties they wanted to buy.
Concerned bridesmaids needed a rabbit in their hat to prevent losing the next deal.
That magic rabbit came in the form of buyers modeling strong rent growth and low terminal cap rates.
Was this rent growth supported by the market? Not yet.
Was it supported by research from industry data providers? Kinda.
Buyers needed more juice in their financial underwriting and simply decided to lean into the market .
Thoughts on 2025
These last few months signaled that capital is both plentiful – which we already knew – and that buyers are anxious to deploy this capital.
I expect a few slow months in the market as we more fully absorb the election results and changes in interest rate policy, yet after this lull I expect a vibrant 2025.
The investment sales market sputtered in Q2 2022 and stalled completely by the following quarter. We are coming up on a 3-year anniversary of that market stall and that is nearly unprecedented.
Take a breath, enjoy the holidays, then buckle up for a great 2025!
If you own a 50+ apartment building in Washington State, give me a call, I’d love to discuss your property and how our expertise will ensure you maximize return on your investment.
About Dylan Simon
I specialize in the sale of 50+ unit apartment buildings and apartment development land across Washington State. Our Team of 10 apartment sales professionals is dedicated to helping apartment owners and investors sell and buy apartment buildings and development land from $1 million to over $100 million.