Sales of rental apartment buildings are falling at the fastest rate since the subprime-mortgage crisis, a sign that higher interest rates, regional banking turmoil and slowing rent growth are undercutting demand for these buildings.

Investors purchased $14 billion of apartment buildings in the first quarter of 2023, according to a preliminary report by data firm CoStar Group. That represents a 74% decline in sales from the same quarter a year earlier and would be the largest annual sales decline for any quarter going back to a 77% drop in the first quarter of 2009.

The $14 billion in first-quarter sales was the lowest amount for any quarter since 2012, with the exception of the second quarter of 2020 when pandemic lockdowns effectively froze the market.

The recent drop in building sales follows a stretch of record-setting transactions that peaked in late 2021, when the multifamily sector was a top performer in commercial real estate. Cash-rich investors had a strong appetite for apartment buildings. Their top choices were in Sunbelt cities such as Dallas, Phoenix and Tampa, Fla., where rental housing is largely unregulated and rents were rising 20% or more annually until last year.

Sales have plummeted because the math for buying an apartment building makes a lot less sense now. The cost to finance building purchases has jumped alongside the fast rise in interest rates. Rents are running flat, or are even declining in some major metro areas, after record increases. A upheaval in banking is also making it more difficult to buy buildings, investors and analysts said, as more lending institutions pull back or lend only at high rates.

As a result, most apartment-building values are falling, and many landlords won’t sell at today’s lower prices.

“Nobody wants to take a loss when they don’t have to,” said Graham Sowden, chief investment officer at RREAF Holdings, a real-estate investment firm based in Dallas.

The decline of apartment-building sales is similar to a pullback in the broader residential housing market, where home prices fell year over year in February for the first time in 11 years and sales declined sharply from a year earlier. Home sales, too, have remained limited because of rising interest rates, and home prices have been falling for months in some parts of the country.

Prices of multifamily buildings dropped 8.7% in February compared with the same month a year earlier, according to the MSCI Real Assets pricing index. A separate measure by Green Street, which tracks publicly traded landlords, found an even sharper drop, with building values down 20% from their late 2021 highs.

Mr. Sowden said his firm has started investing in new property types, such as recreational-vehicle parks, while buyers and sellers remain at an impasse over what apartment buildings are really worth.

Fewer sales might be good news for apartment tenants, because buyers say they aren’t able to raise rents as quickly as they once could. Many real-estate owners had ramped up their multifamily businesses when borrowing costs were much lower, enacting business plans that called for raising rents before selling properties to pay out investors.

Nationally, apartment rents in March were up 2.6% compared with a year earlier, according to Apartment List. But the pace of annual rent growth continues to fall, and is well below the pandemic high of nearly 18% set in 2021, Apartment List said. Rents fell on a monthly basis between September and January, and though they are up slightly again this spring, it hasn’t been enough to reverse an overall downward trend.

Now that landlords can’t raise rents as before, they are trying to maintain the value of their properties in other ways, said Trevor Koskovich, president of multifamily at the Northmarq brokerage firm. That includes cutting costs, making repairs and working harder to keep their current tenants from leaving. When rents were growing at blistering speed, “it was OK to be less discerning in your operations,” Mr. Koskovich said.


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Brokers and investors said they don’t expect building sales to pick up meaningfully until next year, in part because nearly half a million new units are slated for delivery this year, the most in nearly 40 years.

The recent troubles hitting regional banks are also a blow to the sector. These lenders became the second-largest source of multifamily loans last year, after government-agency-backed loans, according to MSCI. Many of these smaller banks are now reducing their lending.

But there is one type of sale most everyone expects more of: forced sales. A number of investors bought buildings in recent years with short-term, floating-rate debt. Because of rising interest rates, those loans cost a lot more to pay down than they did when building owners first borrowed the money.

The remaining balance of many floating-rate loans will come due this year, and borrowers whose buildings aren’t bringing in enough cash every month might have to sell their buildings to pay off their debts.

“We’re in the very early stages,” Mr. Koskovich said.