Investors and employees in the multifamily sector are subject to ongoing financial pressures such as record-breaking inflation, ongoing supply-chain issues, rising interest rates, and declining consumer confidence. As a result, many owners and managers of rental properties are left wondering what the future of the multifamily sector holds due to these worries.
AP News reports that although U.S. inflation has recently decreased, it is still very close to a 40-year high. Prices for everything, from groceries to gas, are still higher than usual, putting pressure on consumers’ spending ability. As a result, many are making financial adjustments. The outlook for multifamily rentals is understandably worrying for the owners and managers of rental communities. 2023: Will it be a rough ride?
High Occupancy And Record Rental Growth May Be Coming To An End
The rental housing market was supported by record apartment demand and rising rental rates despite the turbulence and uncertainty caused by the pandemic in the United States over the past two years. According to CoStar Group, the New York Times says that “tenants in one-bedroom apartments have been handed new leases costing nearly 17% more on average than they did in March 2020” in buildings with more than 50 units. In addition, according to Yardi Matrix’s survey of 140 cities, Multi-Housing News reported that the average U.S. asking rent increased 12.6% year over year through July 2022. At the same time, the country’s occupancy rate remained at 96% for the fifth consecutive month.
Do any indications that the demand for rented homes is declining? Jay Parsons, a RealPage analyst, says it plainly: “Several indicators point to a sharp cooling off in the once-hot rental housing market.” According to him, the unexpected halt in house construction has caused apartment demand to plummet from all-time highs reached in 2021. According to Multi-Housing News, Yardi Matrix data also indicates a slowing expansion. Since June 2020, only one month has had a slow rent rise (August). This pattern is expected to continue until the end of the year.
It sounds concerning when apartment demand slows, housing construction stops, and growth slows. What does it mean for multifamily property owners and managers?
A Return To Stability
While record-high absorption (580,000 units) led to record-high rent increases in 2021, Multi-Housing News notes that “the absorption softening—roughly half that pace in 2022—does not send negative signals but is instead dropping into values reflective of a typically solid year.”
The recent easing of apartment demand is expected, according to RealPage’s Parsons. The third quarter of 2022, which is usually a busy leasing time, saw a slowdown in lease activity, and for the first time since December 2020, effective asking rentals decreased month over month. Despite this, Parsons claims that this is a return to typical seasonal pricing. To be clear, the apartment market in the United States is still strong, says Parsons. The third quarter of 2022, which is usually a busy leasing time, saw a slowdown in lease activity, and for the first time since December 2020, effective asking rentals decreased month over month. Despite this, Parsons claims that this is a return to typical seasonal pricing. To be clear, the apartment market in the United States is still strong, says Parsons. Although it increased by 1.0 percentage points in the third quarter, the apartment vacancy rate remained low at 4.4%.
Danielle Hale, the chief economist for Realtor.com, discussed her expectations for multifamily rents in 2023 in an interview with CNBC. Hale predicted that rent growth would moderate but might not return to its pre-pandemic levels. Instead, she indicates that, despite being less pronounced than in 2021–2022, the rent price increase would likely continue to be high long into the New Year.
Impact On Deals Involving Multifamily Units And Building Starts
Construction of new multifamily apartment complexes, build-to-rent single-family houses, and sales of existing rental housing are all significantly impacted by rising material costs, increased borrowing rates, and persistent economic instability. A sharp increase in Treasury rates “may drive potential agreements to the sidelines as borrowers wait out the volatility,” warns the Freddie Mac Multifamily’s 2022 Midyear Multifamily Outlook.
Like this, RealPage’s Parsons predicts a decline in the number of multifamily complexes beginning new construction. In addition, Parsons expects that the number of new apartment starts will shortly decline from multi-decade highs due to increased borrowing costs and weakening fundamentals.
Rents and occupancies could stay strong despite a decline in construction starts. That’s because there is a severe housing scarcity in the United States. According to a recent study funded by the National Multifamily Housing Council and National Apartment Association and published in Multi-Housing News, the United States needs to construct 4.3 million additional apartments by 2035 to meet demand, the deficit, and affordability issues. As a result, there is a need for more rental housing compared to the market, which drives up rents and occupancy rates.
Enduring Optimism Toward Rental Housing As An Investment And A Top Employer
The outlook for rental housing is still positive, although rising inflation can be both disruptive and unsettling for multifamily owners, investors, and employees. Adam Kaufman, a real estate investing specialist, believes there are many reasons to be optimistic. He tells Forbes that “multifamily assets, in particular, tend to fare well in an inflationary time.” “Economic expansion promotes employment and more outstanding wages, which boosts housing demand. The housing market as a whole also has a persistent shortage of about 5 million units. These circumstances enable owners of multifamily properties to raise rental rates and offset rising labor, construction, insurance, and other costs, thereby hedging the impacts of inflation.
Even more succinctly, RealPage’s Parsons states: “At the end of the day, individuals need a place to live. Both working and shopping can be done remotely. But you require housing and accommodation. That’s good news for long-term housing growth of all kinds.
Whether establishing communities or careers, such are comforting attitudes for multifamily professionals.
Conclusion
In the end, interest rates are driven by a number of factors, and the multifamily industry can do little to control these variables. While there is no guarantee what will happen in 2023, good preparation and careful planning will help you navigate an increasingly difficult lending environment. Good luck!
To know more about investing in multifamily real estate, contact Terra Equity Group.