The Near Future For Multifamily

The multifamily real estate market is an ever-changing landscape. As we step deep into Q4, it’s important to look to the future, and keep a close grip on the opportunities that lay ahead. Let’s take a look at some insights on where the market is headed and how investors can mitigate the uncertainty of historic times.

1. The Federal Reserve’s Stance on Interest Rates

The Federal Reserve plays a significant role in shaping the multifamily real estate investment landscape through its control of interest rates. The Fed started increasing the target federal funds rate in March 2022 and the trend is expected to continue into 2024.

Key Takeaways

  • The Federal Reserve has raised interest rates 11 times since March 2022.
  • The FOMC has decided to hold the target range steady at 5.25% to 5.5%.
  • Expectations point towards an additional 0.25% rate hike by the end of 2023.

2. Multifamily Developer Confidence

Despite a highly competitive landscape and increased costs in land, labor, and construction materials, multifamily developer confidence remains high. The robust economy has been a significant factor in fostering this optimism. 

3. The Demand for Multifamily Properties

The U.S needs to build 4.3 million new apartment units by 2035 to meet the existing demand for multifamily properties. Positive job growth, high single-family housing prices, and favorable demographics have been driving this demand.

4. The Supply of Multifamily Properties

In contrast to the high demand, the supply of multifamily housing is expected to increase by nearly 7% by the end of 2023. Despite not meeting the demand entirely, it’s a step in the right direction.

Key Takeaways

  • Apartment completions will increase by 6.9% in 2023 and 6.5% in 2024.
  • More than 1.1 million units are currently under construction.

5. Multifamily Market Performance

The performance of the multifamily sector has been positive, albeit subdued, during the first half of 2023. This trend is expected to continue for the rest of the year with rent growth increasing slightly but with vacancies likely rising.

6. Vacancy Rates

The national multifamily vacancy rate increased slightly during the first quarter of 2023 and remained unchanged during the second quarter. However, it’s expected to rise over the remainder of the year and possibly into early 2024.

Key Takeaways

  • The national multifamily vacancy rate is expected to rise to 6.0 percent by year-end 2023.
  • The rate is expected to peak at 6.25 percent in 2024 and then decline to 6.0 percent by 2025.

7. Rent Growth

While rent growth turned positive in 2023, it’s not expected to maintain its momentum for the rest of the year. Rent growth for all classes of multifamily units has been positive but still below recent trends.

Key Takeaways

  • Rent growth was 1.0 percent for the first half of 2023.
  • Expected to end the year in the range of 1.5 percent to 2.0 percent.
  • Class A unit rents are forecasted to experience the lowest level of rent growth.

8. Concessions

With rent growth trends trailing the historical average, concessions have remained unusually stable for all classes of units during the first half of the year.

Key Takeaways

  • As of the second quarter of 2023, 13.1% of units were offering concessions.
  • The average concession level for all units remains at 4.5%.

9. Net Operating Income

Despite a significant slowdown, net operating income growth is expected to remain positive.

Key Takeaways

  • Net operating income growth is expected to decline this year but then stabilize next year.
  • Expected to increase slightly further out into the longer-term forecast.

10. Property Value and Sales Volume

Multifamily property values have been declining since the beginning of the year and this trend is expected to continue through the fourth quarter of 2023.

Key Takeaways

  • Property values could decline within a range of -15 percent to -20 percent.
  • Multifamily sales are expected to slow in 2023, possibly totaling less than $200 billion compared to $304 billion in 2022.

11. Cap Rates

Multifamily cap rates have increased for several quarters and are likely to continue to rise.

Key Takeaways

  • Cap rates are expected to further increase during the final few months of the year, from the current rate of about 5.3 percent to between 5.5 percent and 6.0 percent over the next 12 to 18 months.

In summary, the multifamily housing market is expected to experience a softening in demand extending into 2024. However, with careful planning and strategic investment decisions, one can navigate the changing tides and continue to thrive in the market.

We find that the most opportunistic times to make strategic acquisitions are when demand has faded from its peak and qualified buyers gain leverage. The market we are experiencing is quickly producing a higher level of actionable opportunity than we have seen in several years. 

While investors are always encouraged to practice prudence, the multifamily real estate market is poised to present generational buying opportunities in the coming years as the market retracts from sky-high peaks and savvy operators take action on trouble assets.

Please note that the market conditions can change rapidly and it’s important to stay updated and make informed decisions based on the latest data and trends.

Remember, investing in multifamily real estate is not just about riding the waves of the market, but also about navigating its currents and charting a course that leads to your financial goals.

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Choosing the Right Market for Multifamily Property Investments

Investing in multifamily properties requires a deep understanding of the market dynamics to ensure profitable decisions. Market analysis provides a comprehensive view of the various factors that influence the multifamily real estate market, including demographic shifts, economic conditions, and housing trends.

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