Multifamily fundamentals remained healthy through the first half of the year, but doubts abound about the impact of interest rates on the economy and capital markets, according to a new report from Yardi Matrix.
Yardi Matrix’s Multifamily Outlook for the summer of 2023 stated that demand is holding up, fueled by ongoing robust job growth and strong consumer balance sheets. Yet the capital side of the industry is facing significant headwinds from higher mortgage rates.
- Through the first five months of 2023, asking rents rose $17, or 0.9%, with year-over-year growth falling to 2.6%. Continued deceleration is expected, with rent growth of 2.5% for the full year.
- The average U.S. rent reached an all-time high of $1,716 in May. Outsized gains that were seen on the metro level in recent years are a thing of the past.
- Among major metros, Central New Jersey is forecast to lead the nation in rent growth at 3.7%. Other large metros forecast to have the most rent growth in 2023 are Austin and Albuquerque (3.3%), Charlotte, Salt Lake City, Birmingham, Tucson (3.2%) and Oklahoma City (3.1%).
- Household formation, which drove the 22% cumulative growth in U.S. asking rents over 2021 and 2022, has slowed, but remains positive. Households grew at a rapid rate after the pandemic as job growth boomed, young adults moved out of their parents’ homes and work from-home prompted renters to form their own households to gain more living space for offices, children and pets.
- Although some pandemic demographic trends are moderating, the desire for more space that created household decoupling appears to have staying power, which should drive apartment demand.
- Multifamily demand is also boosted by the sharp drop in home sales, which keeps renters in apartments. Low in-place mortgage rates are discouraging homeowners from selling homes, keeping inventory low and single-family prices high.
- Home mortgage rates rose to 6.5% in March 2023, up 230 basis points from March 2022, increasing monthly mortgage costs by 29% and raising ownership costs by 20%, according to the Harvard Joint Center of Housing Studies. The research shows that homeownership has become unaffordable to 2.5 million families.
- Regional migration that fueled an explosion of demand in Sun Belt states in 2020 and 2021 has slowed. The inflow to states such as Florida, Texas and Arizona by households looking for jobs and less expensive housing continues, but it has returned to levels more consistent with long-term trends. Metro-level rent growth is rotating out of some of the Sun Belt markets that produced the biggest gains during the pandemic.
- Recent year-over-year growth is highest in markets where increases have been more consistent, including Indianapolis and Kansas City in the Midwest and New York City and Boston in the Northeast.
- Supply growth is a factor in the regional shift in rent growth. Some of the fastest-growing markets such as Austin (17.1% increase in supply forecast by year-end 2024), Miami (14.2%), Raleigh/Durham (13.5%) and Charlotte (12.8%) are generating supply pipelines that will add more than 10% to stock in the next two years.
- While healthy demand will enable those units to get filled over time, the short-term impact will be strong competition for renters in the high-end lifestyle segment.
- New deliveries will be high through at least the end of 2024, as the 1 million units under construction come online. Deliveries should total 430,000 units in 2023 and more than 450,000 in 2024, with new supply concentrated in fast-growing Sun Belt metros. Starts are gradually declining because debt is more expensive and fewer banks are financing construction.
“Multifamily rents continued to increase through the first half of 2023, despite challenges that include slowing demand, growing issues with affordability, slower population growth and competition from a large amount of new supply. We anticipate that rents will continue to increase modestly over the course of the year as demand has firmed, albeit at a more moderate rate in line with historical growth levels,” said the author of the report. “Rents will also be constrained by affordability, as a growing number of households are paying more than 30% of their income on rent. This can be addressed with more supply, but at the same time, states and municipalities are passing rent control and limits to development that will backfire if allowed to be implemented.”
The author continued: “The U.S. economy has been solid through the first half of 2023,
especially such key metrics as job growth and consumer spending, but it often doesn’t feel that way because commentary has been focused on inflation and possible downsides. Imminent recession forecasts have a ‘Waiting for Godot’ quality because employment gains continue to surprise on the upside. Economic data coming out
of the pandemic almost serves as a Rorschach test because interpretations vary so much. We expect economic growth to be weak in the latter part of 2023 and the first
half of 2024 before rebounding in the second half of next year. We foresee flat to negative economic growth during that time, although at the same time, the downturn should be shallow.”
For the full report, click here.