At the CREFC (Commercial Real Estate Finance Council) January Conference 2023, stakeholders in the multifamily market discussed, among other topics, their expectations for the coming year. Despite the forecasted recession, most seemed cautiously optimistic, and projections were far from dire. Our own observations of the multifamily market align with this perspective.

There is still capital looking to invest in commercial real estate, and multifamily remains a front-running investment choice. The increased cost of ownership for single-family homes, coupled with a nationwide shortage of housing, creates tailwinds for multifamily product. Even as sale activity slowed in 2022, rental rates continued to increase. However, we are seeing rents beginning to soften in the last 90 days, especially in markets such as Portland, San Francisco, and Oakland. Investors may continue to see moderate rent growth in markets where office utilization rates and employment remain strong. Such markets include metropolitan areas in Florida and Texas, along with Raleigh/Durham, Charlotte, San Diego, and Salt Lake City.

Multifamily construction starts, which rose steadily in 2022, have slowed somewhat and are expected to remain constrained by high construction costs, labor costs, and increased cost of capital. Construction delays eased somewhat in 2022, but a recent National Multifamily Housing Council (NMHC) Construction Survey found 84% of respondents still experiencing delays. Fannie Mae’s Multifamily Market Commentary for January 2023 states, “we believe there will be a modest increase in the level of new units completed in 2023, though a recession could impact this.” Without sufficient new construction to feed supply, lack of available housing will continue to drive occupancy and rental demand.

As the Fed continues to raise rates in an attempt to control inflation, the current debt market is vastly different from a year ago, impacting pricing and making it difficult to compare today’s transactions to those in the first half of 2022. Volatility in the debt markets makes it challenging to value assets, which in turn impacts lending decisions and negatively impacts the velocity of sale transactions.

With interest rates outpacing capitalization rates and debt yield, near term maturing loans may not meet debt yield requirements. In this scenario, owners may have difficulty refinancing without bringing additional capital to the table.

Fannie Mae and Freddie Mac have issued their 2023 multifamily market outlooks, both projecting a modest rise in vacancy rates. Freddie Mac is predicting a slow start to 2023 with moderate acceleration in the second half. According to their 2023 Multifamily Outlook, Freddie Mac projects a gross income increase of 3.5% and a rise in vacancy rates to 5.1%. Fannie Mae projects that vacancy rates will increase to 6%, but notes, “due to elevated mortgage rates and the overall national shortage of housing, we believe that many renters will not move into homeownership in the near term, keeping multifamily fundamentals subdued but somewhat stable over the second half of the year.”