Commercial Real Estate News / Insight / Multifamily Real Estate: How Rising Inflation and Job Losses are Shaping the Market in 2023

Multifamily Real Estate: How Rising Inflation and Job Losses are Shaping the Market in 2023

Published: 03-02-23 Category: Insight

Brian Kidder

MyEListings' markets and economics editor and creates content about global macro events and their impact on US commercial real estate.

an apartment complex as viewed from the pool

In the United States, the multifamily real estate market performed exceptionally well at the height of the COVID-19 pandemic. Because people required a place to live, the demand for apartments increased at least partly as a result of demographic changes. In addition, an injection of new money drove up prices, and between 2019 and 2022, building costs increased by more than a third, all of which helped raise rents.

It might be difficult to best such a legendary performance, though. Notwithstanding population changes, Marcus & Millichap`s 2023 Multifamily Nationwide Investment Forecast shows that there are still a number of reasons driving multifamily upward and forward.

Cost Differentials Between Mortgages And Rent Increased

The high cost of homes and rising mortgage rates are two important factors influencing the expansion of the multifamily industry. The difference between the monthly expenses for rent and a mortgage has doubled as a result of these considerations. Millions of people who might normally move into a house are unable to do so because of this, increasing demand for apartments.

People Continue To Move To Sun Belt Cities

The research also points out that Sunbelt major markets are performing well once more, with net in-migration to Florida metros showing a positive trend, which helped Fort Lauderdale, Orlando, Miami-Dade, and Tampa-St. Petersburg place in the top five of the index. Three significant Texas markets are also represented in the top 10, with Dallas-Fort Worth being ranked second overall.

As a result of these demographic changes, demand for multifamily housing is anticipated to increase as individuals relocate to places with greater employment opportunities, cheaper taxes, and lower costs of living.

Not All Wine And Roses

Yet, the multifamily sector also faces difficulties. First, the demand sparked a building wave that resulted in a high supply schedule that will take effect in 2023. The additional supply will make vacancies more prevalent and slow rent growth in many markets. Other Sun Belt locations, including Phoenix, Salt Lake City, and Raleigh, have already been pushed out of the top 10 performances this year.

According to the research, due to the rise in supply, markets that have seen strong rent growth over the past few years, such Denver, Los Angeles, and Seattle, are projected to suffer more modest gains in 2023.

Also, consumer sentiment and spending have been negatively impacted by growing inflation and worries about prospective job losses. Unexpected developments may increase the strain on the economy even though a recession is becoming more likely sometime in the coming year.

Liquidity Concerns Increase As Rates Rise

Financial markets have been cautious as they attempt to adapt to the new circumstances as a result of the Federal Reserve`s record-tightening of benchmark rates over the past year. Regarding debt service coverage, lenders are being more cautious and vigilant. Should conditions remain stable, liquidity should start to improve once more.

Yet for now, those differences between buyers and sellers have impeded a lot of transactions. According to the survey, people who believe interest rates will continue to rise may want to close transactions immediately, while others might be willing to pay costs now in anticipation of refinancing in the future. Another, little-mentioned idea could be for buyers and sellers to innovate new terms, as well as find ways to collaborate to reduce the point at which markets break after bending so much.

The analysis comes to the conclusion that while the multifamily sector performed well overall in 2022, there would be many obstacles to overcome in 2023. Notwithstanding population changes, there are still other factors that could propel multifamily upward and beyond. Because the aforementioned difference between monthly rent and property payments has doubled as a result of increased mortgage rates and housing costs, millions of people who would be relocating to a home can`t afford to do so, driving up the demand for apartments.

Considerations Regarding Multifam Drivers

Although it is challenging to forecast the multifamily industry`s future, there are a few important trends to keep an eye on. Demand for apartments is probably going to continue to be driven by demographic changes, especially net in-migration to Sunbelt cities. The increase in supply, however, is probably going to have an effect on vacancy rates and slow rent growth in some markets. Moreover, escalating inflation and worries about prospective job losses may make consumers feel down and hurt their wallets.

Multifam Will Continue To Play A Prominent Role In Investment

Despite these difficulties, the multifamily industry has proven to be robust over the years, and many investors are likely to continue to view it as a reliable investment option.

The fact that multifamily real estate is less vulnerable to economic downturns than other real estate investment types, including retail or office space, is one of the major benefits of doing so. In reality, demand for multifamily housing tends to rise when the economy is struggling because more individuals are opting to rent rather than buy.

Inflation Hedge

Also, the multifamily industry has shown to be a reliable inflation hedge. Rents rise up with inflation rates, giving investors a reliable stream of income.

Uncorrelated With the Stock Market

The multifamily industry is also a great way to diversify an investment portfolio because of its minimal correlation with the stock market. Investors can lower their overall risk exposure and potentially increase their returns by making multifamily real estate investments.

Factors Unique to Multifamily Investing

Multifamily real estate investing, however, has its own unique set of difficulties. One is that there is fierce competition in the market, with numerous investors fighting for the same properties. Prices may rise as a result of this rivalry, making it harder for investors to discover properties with good returns.

Maintenance of Multifamily Properties Can Be Challenging

However, maintaining multifamily properties may be difficult and time-consuming, requiring comprehensive familiarity with regional rules and regulations. Also, investors need to be ready to handle maintenance problems, tenant complaints, and other unforeseen difficulties that can occur.

Notwithstanding these difficulties, investors can take steps to minimize risks and increase returns. Working with a seasoned property management business that can take care of the property`s day-to-day operations is one strategy. Investors may have more time to work on other elements of their portfolio as a result of this.

Boiling It All Down

A variety of variables, including the need for housing, demographic changes, investment capital, and building prices, contributed to the multifamily sector`s impressive performance in the United States during the peak of the COVID-19 epidemic. Yet, the business is also dealing with difficulties like a rise in supply, rising inflation, and worries about possible job losses. Despite these difficulties, many investors still view the multifamily market as a reliable investment choice. Investors can reduce risks and perhaps see larger returns over time by partnering with an expert property management business and purchasing value-added properties. Like with any investment, thorough investigation and due diligence are necessary to reach successful long-term outcomes.