Beyond Population Shifts: Why Multifamily’s Outlook Is Good

Article originally posted on Globe St. on March 1, 2023

In the Short Term, Headwinds are Going to Make Things Challenging for Investors.

After historical performance, it’s tough to top yourself. Multifamily has faced that challenge, according to Marcus & Millichap’s 2023 Multifamily National Investment Forecast.

How do you beat the performance that multifamily established during the height of the pandemic? People have to live somewhere, demographic shifts changed the where the population was and moving to, a lot of investment cash pushed up prices, helping to drive rents upward out of mathematical necessity, and building costs jumped more than a third between 2019 and 2022.

There’s still a lot of movement of populations — one reason Sunbelt major markets are again on the top of performance. “Net in-migration to Florida metros is on an upward bend, helping Fort Lauderdale, Orlando, Miami-Dade and Tampa-St. Petersburg all place in the top five of the Index,” says the report. “Similarly, three major Texas markets hold a spot in the top 10, headlined by Dallas-Fort Worth as the second-highest rated overall.”

The overall sector performance in 2022 was good, and there are factors continuing to push multifamily upward and onward beyond population shifts. Housing prices and rising mortgage rates have made the gap between monthly rent and house payments double. Millions who would be moving to a house can’t afford to, putting upward pressure on apartment demand.

But some cold winds are blowing. First, demand set off a wave of building and a high delivery slate that will hit in 2023. The extra supply will increase vacancy rates and push down rent growth in many markets. It has already pushed some Sun Belt markets like Phoenix, Salt Lake City, and Raleigh out of the top 10 performers this year.

Rising inflation and concerns about potential job loss that will likely mean higher unemployment has dampened consumer moods and pocketbooks. There are still expectations of a recession sometime in the next year, and unexpected events could put even more pressure on the economy.

The Fed’s tightening of benchmark rates at a rapid rate has left financial marketing wary as they try to navigate the new conditions. Lenders are more careful and watchful about debt service coverage. As things steady, bid-ask gaps should begin to shrink again.

But for the time being, those gaps between buyers and sellers have paralyzed many transactions. “Those that feel interest rates could climb further may wish to execute on deals in the short term, while others may be willing to incur the expenses now, with an eye toward refinancing down the line,” said the report.