Year-end review of 2022, and outlook for 2023. 

Yardi Matrix has released their year-end review of 2022, also providing their outlook for 2023.  They provide market intelligence for investors, lenders, and property managers, including nationwide market and institutional research reports for multifamily properties.

What have they said and how does it impact your current and potential investments in multifamily?  (You can access their year end report and national outlook here)

The efforts to curb inflation by design, via the Fed’s sharp interest rate hikes, will remain a cause for uncertainty in 2023, but recent data suggests that the Fed might actually manage a relatively soft landing.

While a recession in 2023 is inevitable, economic fundamentals support that it would be a short and mild one: 

• The labor market remains tight, with 261,000 jobs added in October, and while the unemployment rate ticked up to 3.7%, it is still near historic lows.  

• Consumer spending via retail sales was up 1.3% in October, the biggest jump in eight months. Consumers still have a large amount of excess savings, however, it would be used to fund higher expenses due to persistent inflation.

Interest rate hikes have slowed down both single-family and commercial multifamily real estate transactions, as the costs of borrowing and servicing loans have made it more difficult for buyers to purchase at sellers’ asking prices.  For single families, sellers do not want to give up their properties for less than what they thought it is worth, and they do not want to trade their mortgages into one for a new property with rates that are three times what they previously were.

This dynamic tilts towards renters, which positively bodes well for multifamily investors, as the supply of both single-family and multifamily homes will remain limited due to the current challenges of financing purchases and developments.

Demand for multifamily rental units remains strong due to the limited supply.  There is currently a 600,000-unit shortfall of apartments in the U.S. due to underbuilding after the 2008 financial crisis.  An additional 4.3 million units (307,000 units per year) are needed by 2035 when accounting for the current shortfall and projected demand.  At the current rate of deliveries, Yardi Matrix predicts the multifamily housing deficit will not be resolved for approximately 10.5 years.

Year-over-year rent increases have decelerated in the 4th quarter of 2022, decelerating from 9.2% in September to 8.2% in October, however, that is the norm with seasonal cycles.  Interestingly, the rate of deceleration has been less than that of previous years, highlighting continued demand.  Rent increases in 2023 will not be nearly as much as the record double-digit rates in 2021 and 2022, reverting back closer to historical norms.

So what is the bottom line?

• There will be a recession in 2023, however, it will be a mild and short one.
• The fundamentals of the economy remain strong, with low unemployment, continued consumer spending, and strong individual savings.
• There will be a slowdown in sales and development of single-family and multifamily properties.
• This slowdown will continue to increase the demand for residential rental units, given the current shortfall.
• U.S. multifamily continues to be the “stand out” sector among all U.S. real estate asset types.

The keys to success will continue to be being thoughtful in the selection of markets, investment strategies, and partners to invest with.  

If you want to talk about how you can build and preserve wealth and generate passive income like the ultra-rich, set up a time to talk with me