Despite Economic Turbulence, Multifamily Fundamentals Remain Strong After Q1 2023
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
The last two years have been both volatile and highly lucrative for US multifamily real estate: Record highs and major setbacks permeated the market, leaving many investors uncertain about the trajectory of multifamily real estate as 2023 approached.
The good news for investors is this: Despite high inflation and rising interest rates in H2 2022, the national multifamily real estate market is stable and showing strong fundamentals.
Regular rental rate increases, stable occupancy, high mortgage costs, and high household formation rates all indicate positive momentum for the US multifamily real estate market as we continue into 2023.
Summary of Q1 2023 Multifamily Real Estate Performance
The national multifamily real estate market has started to cool down after a sustained period of strong activity: Average multifamily rents increased to about $1,700 per month at the end of March 2023, representing a $3 increase from February. Year-over-year growth is down 90 basis points since last February and is the lowest since April 2021 at 4.0%.
The national occupancy rate in February 2023 fell by about 10 basis points to 95.5% from the same month a year ago; in March 2023, occupancy rates stood at 95.1%. Despite rising interest rates and inflation, a strong labor market and economic growth have kept demand relatively stable.
Overall, experts expect that the multifamily market will soften in the second half of 2023. However, most drops should be back to approximate pre-pandemic averages, indicating that we may finally be seeing some multifamily return-to-normal after the last three years.
The Midwest and Northeast Multifamily Markets Lead the Pack
The most sustained year-over-year rental growth was localized in key markets in the Midwest and Northeast US. These high-growth markets were characterized by a combination of strong economic activity, rising population growth, and relatively few multifamily unit deliveries.
Among the top 30 metro areas, the markets with the highest year-over-year rental growth as of Q1 2023 were:
- Indianapolis, at 8.6%;
- Kansas City, at 6.9%;
- NYC, at 6.9%;
- Boston, at 5.8%; and
- Chicago, at 5.2%.
Although not normally a lucrative market, Kansas City was significantly boosted thanks to its strong economy and low unemployment rates.
Conversely, the markets with the lowest growth rates were:
- Atlanta;
- Austin;
- Las Vegas; and
- Phoenix.
Las Vegas and Phoenix both had negative year-over-year rental growth with falling rental rates. In general, rental growth among renter-by-necessity asset classes was higher than lifestyle asset classes.
Interest Rates Have Slowed Sales Transactions
Although average multifamily rental fundamentals are relatively strong across the US, rising interest rates have caused sales transactions to slow as the cost of capital has grown exponentially.
Several high-profile commercial real estate defaults in the past few months have some investors worried, though multifamily has historically been a resilient investment through recession.
Mortgage Rates Have Priced Many Out of Single-Family Homes
Another factor contributing to stable multifamily growth has been rising mortgage rates pricing would-be homeowners out of the market. Average 30-year mortgage rates have nearly doubled to almost 7% in Q1 2023 from 3.22% in Q1 2022, meaning demand for homeownership will be funneled to rental properties.
Rental renewal rates have stayed consistent over the past year at approximately 63%, while year-over-year renewal rental growths were 9.3%. These consistent renewals indicate that, while renters have income for rental increases, they are choosing to stay due to a lack of other options in larger metro areas.
Banks Get More Cautious With Commercial Lending
Some of the largest concerns about the 2023 multifamily market relate to recent bank failures and worries over bank lending. Regional banks issue a large proportion of commercial real estate loans, including loans for developing multifamily complexes.
Smaller, regional banks held nearly 22% of the share of commercial loans in 2022—almost double the percentage a decade ago. Current rates for traditional five-year commercial loans are between 5% and 8%, and the tighter loan standard reduces proceeds by as much as 20%.
Experts do not believe that another real estate market crash like in 2008 is on the horizon, but defaults and liquidity crises at regional banks are a real risk the multifamily market will have to navigate in 2023.
Overall Outlook for Multifamily Real Estate in 2023
The last three years were full of historic growth for the multifamily sector, but it couldn’t last forever. Despite higher-than-average inflation and rising interest rates, the tight labor market and high tenant demand have kept occupancy rates low. It is likely that the market will slow down further in the second half of 2023 while still posting moderate rental gains.
Additionally, markets across the country will see a large number of unit deliveries over the next 12 to 18 months. This addition of new space will likely increase vacancy rates and force landlords to tolerate more lease concessions.
Takeaways for Multifamily Investors
Although the multifamily market is expected to slow overall, there will be pockets of high growth in some markets, especially those in the Midwest. Of all rental leases, lease renewals showed the highest year-over-year rental growth, so landlords are incentivized to keep current tenants and renew their current leases instead of finding new ones.
Demand will likely soften as new supply hits the market over the next year. Landlords can take an advantageous position by acquiring high-quality Class A properties that have been constructed in the last five years.
As always, stay vigilant, do your research, and happy investing.
Find & Connect With Commercial Agents & Brokers Near You for Free on MyEListing.com
MyEListing.com maintains one of the largest databases of commercial agents & brokers in the country. Use it for free to find & connect with commercial agents & brokers near you for free.
Other recent articles
Article Search
Share
All Article Categories
