The Multifamily Market Outlook for 2023

After years of performance from multifamily properties, we inevitably wonder what changes will come in the following year—especially following a bit of market tumult from the pandemic. Fortunately, it appears the multifamily market recovered well from early pandemic challenges, and signs point toward 2023 being a healthy year for the industry, with more pronounced growth in the second half. 

Expected Trends

Tenant Demand Expected to Remain High

After an increase in vacancies early in the pandemic, multifamily occupancy rates rebounded in 2021 and may begin to even out from record highs this year. Vacancy rates reached 8.5% in late 2020 but closed out 2022 at 6.1%. This number was largely driven by vacancies in the luxury market, while moderately-priced tertiary markets remained below the national average.

Home prices increased by 39.27% between July 2020 and July 2022 marking the most rapid change in home prices in over 30 years. This leaves room to wonder if a modest decline is in the near future. Expect continued demand for properties that support independent senior living through accessibility accommodations.

New Multifamily Properties Will Absorb Many Tenants

Vacancy rates would likely be expected to fall even further, but for the large number of new multifamily properties coming onto the market through 2023. Fannie Mae expects new buildings will outpace demand in 2023, creating a national vacancy rate of 6.0%. 

Expect a Modest Decline in Rent and Interest Rates

Rents grew rapidly in 2021 and fell slightly in 2022. Economists attribute that rapid growth to pandemic demand patterns rather than an ongoing market trend. Expect a decline this year due to inflation and recession expectations.

Multifamily investors enjoyed rock-bottom interest rates in 2022, but the low rates are unlikely to remain in 2023. Annual multifamily originations are expected to decrease by about 10% this year.

Forbes expects the Fed to raise rates again at the start of February. This increase will likely be by 0.25 or 0.50 percentage points. These small hikes are expected to continue through the early months of 2023 or until the Fed can hold interest rates steady. The second half of the year may yield lower rates, as the Fed may opt to cut rates in an effort to combat inflation.

Less Traditional Markets Will Continue to Shine

Previously overlooked areas in the Midwest and South Central US are expected to retain their newfound popularity–created by workforce changes during the pandemic. Whether moving closer to family, taking advantage of lower prices or simply looking for more space, many Americans emigrated from traditional hotspots.

At this point, we lack indications that those moves are being reversed. Increasingly, employers seem to be capitulating about returning to old staffing patterns. Additionally, seemingly never-ending virus surges and subsequent legislation across the country make a return to our previous normal seem unlikely—at least in the immediate future.

More Factors to Consider

The Pandemic’s Impacts

Mortgage interest rates ebb and flow with a variety of economic factors, including inflation, economic growth, and unemployment. The most well-known factor is the Federal Reserve.

The Federal Reserve enacted an emergency rate cut in March 2020 in response to the pandemic. The Fed started buying monumental amounts of such securities at the onset of the pandemic, as well.

Key officials at the Fed indicated policy changes that are likely to lead to increased mortgage interest rates in late 2023. Many Americans dread an interest rate increase, though just as many welcome it for alternate reasons.

Low interest rates like those we have seen since March 2020 provide clear, tangible benefits.

  • Buyers experience greater buying power when rates are low.
  • Current property owners get a welcome decrease in monthly bills when they refinance at a lower rate.
  • Low mortgage rates and new options allow more people to gain a greater ability to purchase.
  • Mortgage loan originators increase volume and brokers earn a greater number of commissions, and so on. 

Interest rates and inflation have an inverse relationship, meaning that as one rises, the other falls. As a result, raising interest rates becomes a critical tool in curbing inflation. 

Housing Prices

With a rapid growth in housing list prices, many are wondering, will a crash follow the boom? While housing market crashes create big headlines, they are rare in the United States. The infrequency is likely due to the significant transaction and carrying costs of buying and maintaining a home that prevents widespread speculative behavior. 

Housing bubbles are created by a glut of home buyers, easy access to credit, unusually low interest rates, and optimistic expectations of home appreciation. 

Conversely, housing bubbles burst when buyers dissipate even as supply increases, interest rates take a sharp hike, economic downturns occur and demand is satiated. 

Throughout the pandemic, housing markets across the country experienced record-low inventory. And some metro areas saw inventory as low as two weeks. Put simply, homeowners did not list their homes.

These new problems exacerbated an already-existing inventory shortage. In fact, demand has dwarfed supply since 2010. With many delayed 2022 projects finishing up in 2023, this imbalance may reverse in the coming year. It is unlikely that interest rates will remain at rock-bottom levels forever, but rising interest rates are not synonymous with falling home prices.

Final Thoughts

The upcoming year appears to be a healthy one for multifamily investing. To get involved with Life Bridge Capital, start by joining our investor list.

Life Bridge Capital is a leading real estate syndication company. We offer our investment partners the opportunity to leverage shares of multifamily rental properties into a passive monthly income.

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