Yardi Matrix Broadly Revises Multifamily Forecasts Down for 2022 and 2023

During the time since the beginning of the pandemic, revisions of expectations in multifamily were largely of the positive sort. Values growing even more. Cap rates falling to unheard of levels, but which were still manageable given that rents were increasing beyond historical precedents.

There’s still some coasting on the momentum built up, according to Yardi Matrix, but its October multifamily rent forecast update sounds much grimmer. At the very end, came this:

“Our forecasts for the end of 2022 and for 2023 have broadly been revised downward, as the usual seasonal deceleration has been exacerbated by a more uncertain economic horizon in the medium term. Headline end-of-year growth for 2022 will still be significantly elevated from the long-term average, but almost all of that growth has already occurred, and most markets will finish out the year with minimal additional growth.”

Still, that isn’t terrible. Things slow down but a good financial year. Except, conditions keep turning, with rent increases in 2023 not matching what the markets saw in the first half of 2021 and 2022. Yardi noted that with inflationary pressures remaining high and continued employment gains, like this week’s announcement of 10.7 million open jobs, a reversal from August’s drop, that could provide a “stronger-than-average jump out of the gate in the spring.”

Although much of that is uncertain. In its Wednesday release after the meeting of the Federal Open Market Committee and the announcement of yet another 75-basis point increase in the baseline interest rate, the Fed wrote, “In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

In other words, should the economy show signs of actually cooling down, the agency might reconsider the size of future jumps. One of the criticisms of the Fed is that it has continued been making significant increases even though it can take a good six months for the impact to hit the market. Continuing that path could turn into an overcorrection and bring on a recession, which would be a general business disaster everywhere, including in multifamily.

However, even a slowdown could mean eventually inflation will fall and unemployment rise, “and when that happens rent growth will largely become anemic,” Yardi says.

This warning has a secondary meaning for multifamily. According to Moody’s Analytics, there’s a rising trend of negative leverage, where the internal rate of return for unleveraged property investments would be higher than the IRR of ones using leveraged money. The credit rating agency said “some investors are making very aggressive assumptions” about rent increases that could offset negative leverage.

When rental growth slows for an extended period of time, assumptions that were aggressive can turn unrealistic.