Through the first half of 2023, the multifamily market appears to be returning to a more normal seasonal pattern, although slightly weaker than the years leading up to the pandemic. The economy is maintaining positive momentum, although slowing, with the labor market in particular proving to be quite resilient. However, the higher interest rates, declining property values, and lack of price agreement between sellers and buyers have led to slowing multifamily origination volume. Over the short term, we expect the multifamily market will slow but maintain strength in 2023, and over the longer run will remain a favored asset class due to its long-term tailwinds. Read the full report.

Stabilizing Multifamily Market

After falling during much of 2022, rental demand was positive during the first half of 2023, which led to positive rent growth. The rent growth seen so far this year feels weak in comparison with not only the post-pandemic years, but also when compared with conditions seen going back to 2000. Meanwhile occupancy rates have declined slightly so far in 2023, albeit at a much slower pace than what was experienced in 2022. However, In the second quarter of 2023, vacancy rates remained flat and near the long-term average. 

Economy Continues to Avoid a Recession 

The recent multifamily performance is partially attributable to the economy’s steady performance, especially the labor market. Through the first six months of 2023, the U.S. economy added on average nearly 280,000 jobs per month — which is nearly 100,000 jobs per month more than the average seen in 2019. 

Although the recessionary concerns have lessened since the start of the year, there are potential headwinds that could veer the economy into recessionary territory. These include a misstep by the Federal Reserve, the spending stipulations in the debt limit agreement, the resumption of student loan payments, and, to a lesser extent, the banking crisis, which appears contained at this point due to a strong governmental response. 

Modest Multifamily Performance 

For the remainder of 2023, we expect the multifamily market to continue its return to a more normal pattern. Although the growth rate may fall short of the prior decade, it should remain relatively stable given the state of the overall economy. Our baseline forecast is for vacancy rates to end 2023 at 5.1% and rent growth to total 3.1% for the year. However, the risk of a recession remains elevated and if those assumptions do not come to fruition, then the high levels of new supply combined with sagging demand could lead to materially lower multifamily market performance. If the economy avoids a recession and the labor market remains relatively strong, then we believe that the high levels of new supply will be absorbed, although specific markets may see more softening than others.

Lower Origination Volume Forecast

The multifamily investment market is still slow through the first half of 2023. Since the end of 2022, cap rates and property prices have started to acclimate to the higher interest rate environment, with cap rates moving up and valuations down. These headwinds facing the multifamily investment market will negatively impact the transaction volume through 2023. We expect volume to decline to about $370 billion for 2023, down roughly 17% from 2022. 

Despite the economy skirting by a recession so far, there remains several headwinds that could disrupt the economic and multifamily stability. We expect rent growth this year to be positive but remain muted as the market works through the uncertainty and high levels of new supply.

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