Multifamily fundamentals' current trajectory indicates that it is on track for a healthy 2023, according to Freddie Mac, although it may be a stronger second half compared with the first half, according to its 2023 Multifamily Outlook report.
Rents are projected to remain positive but continue to moderate, with the early few months of the US economy overall carrying a great deal of weight.
"Vacancy rates will increase from a combination of slower demand due to economic uncertainty and the high volume of new supply entering the market," according to Freddie Mac. "Similarly, the volume will be muted until interest rate volatility can be curbed allowing for price discovery.
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"The timing of this will determine how strong the multifamily market will grow in 2023. Even so, the tailwinds remain that will help prop up the multifamily market in the long run.
About that Recession
Demand is expected to increase later in the year unless the US falls into a recession. Freddie Mac estimates 3.9% rent growth for 2023.
"These forecasts rely on positive employment and household income growth, along with lower inflation," according to the report.
"However, home prices are expected to decline in 2023, and data providers indicate higher levels of new multifamily supply will enter the market at a time when demand may slow. We think that one of the biggest risks to the multifamily market's performance in 2023 is the state of the labor market throughout next year."
Florida Home to Hot Markets; Phoenix and Vegas, Not So Much
Combining projected rent and vacancy rate expectations by metro, Freddie Mac named top and bottom performers for 2023.
Florida markets make up half of the top 10 markets, according to Freddie Mac, along with smaller Southwest markets in Oklahoma, Houston, and Riverside.
Phoenix and Las Vegas have fallen out of the top 10 from last year and many Florida markets remain in the top 10, but with lower growth in 2023 than expected in 2022.
Timing Will Play a Large Role Overall
Freddie Mac expects property prices to continue their moderation and "could see slight declines in the year ahead given the expected rise in cap rates."
This will lead to slower transaction volume throughout the end of 2022 and into 2023.
Freddie Mac expects 2022 volume to be in the range of $460 billion, down 5.5% over the year, and 2023 volume down roughly another 4% to 5% to $440 billion.
"We expect fewer transactions given the negative leverage situation, which supports the idea that investors are waiting for the market to come back to an equilibrium," according to its report.
"We think many financed properties are well positioned to cover their debt payments given their likely low note rates and the strong recent market performance. As such, borrowers are not as pressured to sell properties at a lower price point and may wait for more favorable investment opportunities, also slowing overall business volume."
These forecasts are based on inflation and Treasury rate hikes slowing, the firm said.
"The timing of this impacts expected volume growth in 2023," Freddie Mac said. "If this happens earlier, and investment demand returns sooner, we could see higher volume in 2023. However, if it takes longer, and especially if the economy slips into a recession, we could expect volume to be lower as the price discovery and negative-leverage situation is prolonged."