Multifamily Market Outlook 2023
As we look ahead to 2023, there are several key trends in the multifamily market that we should be aware of. Here are five things to keep an eye on:
- Moderate growth: The multifamily market has recently seen strong occupancy and rent growth, but this growth is slowing down due to rising interest rates and instability in capital markets. However, the multifamily sector is expected to see healthy growth by the end of 2023, as long as the labor market does not fall into a recession. In the shorter term, we can expect to see a moderation of the market in the first few months of 2023, with vacancy rates increasing to 5.1% (up from 5.3% in 2020) and rent growth slowing to 3.9%. This is still considered a healthy return, as rent growth has ranged from 3.6% to 6.1% (2012-2019) between the Great Financial Crisis and the pandemic. Gross income is expected to grow by 3.5% in 2023, which is near the rate of inflation expected for next year.
- Top performing markets: The best performing markets in 2023 are expected to be smaller southwestern and Florida markets, which will be driven by historically low vacancy rates, strong household income growth, and relatively minimal new supply. These markets are expected to outperform due to their strong economic and demographic fundamentals.
- Bottom performing markets: On the other hand, the bottom performing markets will be a diverse mix of small and large markets with high levels of new supply. These markets may struggle to absorb the additional supply, leading to increased competition and pressure on rent prices.
- Labor market risks: One of the biggest risks to the multifamily market’s performance in 2023 is the state of the labor market. If the Federal Reserve (Fed) achieves a “soft landing” without a significant impact on the job market, consumer confidence will return and household formations will rebound, but most likely not until mid-2023. However, the risk of a recession remains elevated and will continue to be a concern throughout 2023.
- Impact of rising interest rates: Investors in the multifamily market should also be aware that rising interest rates will impact the cost of debt and valuations. While the cost of debt will be affected almost immediately, the impact on valuations will take longer to materialize. Cap rates, which are used to determine property values, have been slow to respond to the higher Treasury rates. This has resulted in compressed cap rate spreads, the difference between the cap rate and the 10-year Treasury, which are currently at their lowest levels since 2007. It will be important to carefully assess the potential impacts of rising interest rates on your multifamily investments.
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