Multifamily at mid-year

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Yardi Matrix released its Summer 2023 U.S. Multifamily Outlook report. It examines the multifamily housing business by looking at 4 factors driving it: the economy, rents, new supply and capital markets.

Economy

The economy has been surprisingly strong through the first half of 2023 with solid job growth and positive, if slowing, GDP growth. Consumer demand has been supported by the huge build-up in excess savings during the pandemic. However, the exhaustion of those excess savings, particularly for lower-income people, along with rising interest rates threaten the continued health of the economy.

Rents

Some of the information the report contains on rents has also been covered in Yardi Matrix’s monthly rent report. However, much of the focus of the outlook report is on forecasted rent growth for the year rather than recent rent growth history. Yardi Matrix expects that the 2.6 percent year-over-year rent growth seen in May will decline only 0.1 percentage point by the end of the year to rent growth of 2.5 percent for the year 2023.

The report cited slower household formation and a return to more traditional migration patterns as factors which will act to moderate rent growth for the rest of the year. While high mortgage interest rates and low supply of for-sale housing will tend to keep people renting longer, the increasing share of renters’ incomes being spent on rent will limit their ability to absorb further rent increases.

Supply

This year and next year are expected to see an unprecedented level of new multifamily supply being completed with 430,000 units expected in 2023 and 450,000 units expected in 2024. While the new supply in 2023 represents 2.9 percent of existing stock nationally, most of the new supply will be delivered in 10 to 15 metros. For example, Austin is expecting 2023 deliveries of 8.2 percent of existing stock with even more units under construction.

Yardi Matrix expects that the increasing cost of capital will dampen multifamily starts going forward., which will give the market a chance to absorb the new supply. Starts could fall further if the economy falls into recession.

Capital markets

The report notes that multifamily transaction activity in capital markets has plunged this year after falling moderately last year. Falling property values in the face of rising interest rates and falling rent growth have caused a gulf to open between buyers and sellers on perceived property values. This has severely dampened sales transactions.

The Yardi Matrix report discussed the potential difficulty that property owners may encounter when their loans must be refinanced by referring to an earlier report on this topic by Trepp. That report found that one-third of CMBS loans maturing between now and the end of 2024 may have issues with debt service coverage after refinancing if interest rates remain at current levels of 6 percent.

The report suggested that property values may fall between 20 and 30 percent from their peaks if cap rates reset to levels that are historically consistent with interest rates in the 6 percent range.

While there are challenges ahead for the multifamily housing property market, the report concludes that strong product demand and fundamental strengths of this market give it better prospects than those of other commercial property types.

The Yardi Matrix outlook report  goes into much more detail on each of these topics. It is available here.