Market Update: November 2023
Hi All,
Happy November! For this market report, we’ll be looking at the strange happenings in the multi-family sales market.
As we get closer to the end of 2023, let’s look at how the multi-family transaction volume has been performing this year, compared to 2022.
The first thing you’ll notice is that total transaction volume is significantly down across the board:
As of November 1st, 2022 YTD there were 315 closed multi-family transactions between Cambridge, Somerville and Medford. As of November 1st, 2023 YTD, there were only 203 closed transactions. This is a massive drop-off of about 1/3rd of total multi-family transaction volume.
The significant transaction drop-off is a result of rising interest rates. 30-year fixed mortgage rates in 2022 hovered between 3.29% and 6%ish until September of 2022 (SOURCE: Freddie Mac), when they continued to push even higher. In 2023, rates started at around 6% and have worked their way up to around 8ish%, as of this writing. With higher interest rates, buyers overall have become more tentative.
So the next question is, with transactions down and more tentative buyers, what has happened to multi-family prices? Prices have been impacted, but less than one might expect:
Why are these price drop-offs lower than some buyers might expect? I think there’s a few answers:
Cambridge, Somerville and Medford are resilient markets with large and diverse tenant pools. Cambridge and Somerville in particular are A-tier markets, with the following:
Excellent public transportation to downtown Boston with short commute times
Cool restaurants, shops, cafes, and things to do
Easy access to Harvard, MIT, Lesley and other schools
Close to Kendall Square biotech hub
Many big developments coming including lab space, retail, and luxury condos
Investors believe that over the long-term, property prices and rental rates will continue to grow, so they are still willing to pay high prices now.
Many investors also believe that in the medium term (1-3 years) rates will come back down and they will have an opportunity to refinance, reducing their payments. They also believe when rates come down, prices will go up substantially.
It will be interesting to see whether more buyers hit the sidelines or if they continue to purchase now - making a bet that prices will continue to rise over the long-term and/or that interest rates will eventually drop off in the next 6-24 months.
Many of my investor clients are taking a very cautious approach right now. At the same time, I believe that good deals are always out there and I strongly believe in jumping at the right opportunity when you find it. Just make sure you put in plenty of buffer in your numbers given current conditions.