— By Ben Galles, senior vice president of CBRE —
Interest rates have been the biggest factor for Reno’s multifamily market this year, reaching some of the highest levels seen in a long time. The market for multifamily properties in Northern Nevada has been slow to adjust to the new lending environment, with sellers unwilling to price assets at a rate of return that would provide most buyers with positive leverage. In other words, the interest rate on loans used to purchase many of the current listings is higher than said property’s cap rate.
Multifamily sales volume in Northern Nevada is down 14 percent compared to the same time last year. One of the major drivers for the drop in sales volume is that only three deals have secured bank debt, with the average loan to value (LTV) of those loans being roughly 48 percent. While cash transactions have represented more than 58 percent of the transactions, a large percentage of deals have involved owner financing. Some owners who needed to move their assets over the past 12 months found that offering below-market interest rate owner financing was a significant selling point. Many of the deals that closed with owner financing had interest rates in the 5 to 5.5 percent range. Buyers also benefited from higher loan-to-value debt, with the average owner financing LTV being around 73 percent.
Also, it’s an election year. Most election years can only be described as abnormal, with many investors adopting a wait-and-see investing approach to determine which political philosophy will lead for the next four years. With this in mind, volume is expected to slow even further in the fourth quarter.
Looking ahead to 2025, a significant rise in deals involving bank debt is anticipated. The Federal Reserve has started to lower the federal funds rate and is likely to continue to do so. While Northern Nevada doesn’t have many multifamily loans coming due in 2025, a few deals involving some seller motivation will likely happen.
This article was originally published in the October 2024 issue of Western Real Estate Business.