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2023 Forecast: Berkadia Analyzes the Multifamily Market for the Year Ahead

Today’s financial environment is marked by inflationary challenges and investor uncertainty, making it paramount that commercial real estate (CRE) investors and operators understand the trends shaping the ever-changing CRE landscape. Berkadia’s 2023 Forecast: National Apartment Research Report provides important market information to help investors set priorities, align investment and financing strategies and navigate multifamily trends influencing national and regional markets across the US.

The 2023 Forecast Report provides an in-depth analysis of both the national and regional trends to help investors make real-time and actionable real estate decisions in 2023. Apartment fundamentals are expected to continue to be strong but normalize to pre-pandemic levels and in-line with national historical averages. Overall, Berkadia is bullish on the multifamily industry as a whole, albeit we are very much in a transitional period and expect some headwinds.

Here are further insights from Hilary Provinse, EVP, Head of Capital Markets and Production Strategy, Co-Head of Mortgage Banking and Institutional Solutions for Berkadia:

Q. The pandemic had serious and lasting impacts on development/construction projects across the US, which only added fuel to the housing shortage. Should investors plan to see an increase in inventory in 2023 to combat the crisis? If so, which regions will see the most supply?

The lingering effects of the Covid-19 pandemic on the construction industry are coming to a head, particularly with apartment deliveries forecasted to swell in 2023. From 2020 through 2022, many developers extended project deadlines due to increased construction and labor costs and shortages. Additionally, nearly 250 communities began construction before the pandemic and plan to lease-up or complete in 2023. This buildup has led to approximately 565,200 units being scheduled to come online by year-end, making 2023 the highest for annual deliveries in more than 20 years. Absorption also looks strong with over 403,000 units of net absorption projected; however, we do anticipate more apartment deliveries than units being absorbed. In conclusion, while we continue to see a lot of construction activity, we are still woefully undersupplied as a nation. Based on our estimates, we still need to deliver 4.3 million new units by 2035 to meet demand.

Q. How do employment trends impact the multifamily industry?

Nationally, the workforce and median household income are both forecasted to expand, increasing 0.7% and 2.8%, respectively in 2023. This combined growth will further support job creation and bolster individuals’ confidence to move out on their own, which parallels the expected pick up in household formation, elevating apartment leasing activity over the next 12 months.

Moreover, with interest rates continuing to rise, and not a meaningful decline in single-family homes, we expect more individuals to choose to be renters in lieu of homeowners. This will further support the strong net absorption projections as well.

Q. What do forecasted occupancy and rent rates mean for investors, renters and operators?

Though net absorption is projected to reach the second highest level in more than two decades, the national occupancy rate is forecasted to settle at 95% in the fourth quarter of 2023, only down 70 BPS from 2022. The year-end rate would be higher than the pre-pandemic cycle average of 94.7% during 2010 to 2019.

Additionally, while we expect occupancy rates to remain strong, we expect rent growth to moderate in 2023. According to Berkadia’s Report, it is projecting 3.3% for the national average for rent growth this year, down from the 6.6% seen in 2022.

We are really transitioning back to a normalized average. While 3.6% was the national historical average pre-pandemic, 3.3% is still healthy in our opinion.

Q. What is your consensus for the multifamily market in the year ahead? How big of a factor is the inflationary environment and the looming possibility of a recession?

Despite market uncertainty and persistent inflation, multifamily remains a strong and resilient asset class compared to other asset classes. Our Forecast Report factors in a potential recession. The expected surge in apartment deliveries in the coming year may create pressure in certain submarkets, but generally we expect occupancy rates and rent growth to remain strong and stable. We expect investor demand to pick up in the second half of 2023. While we are beginning to see cap rates expand given what’s happening in the debt markets, we believe there needs to be more pricing transparency before more investors move off the sidelines. Once pricing moderates, we believe this will give investors more confidence and ballast to start investing again.

I am particularly focused on the deals that were acquired over the past 24 months with floating rate. I expect that there will be a number of deals that will not meet refinancing tests upon maturity or cap renewals. Berkadia is prepared to help its clients find creative solutions to address their needs and challenges.

To learn more about what to expect in 2023, register to attend Berkadia’s 2023 U.S. Forecast Webinar on Jan. 24 at 12 PM ET. Berkadia executives, as well as the Chief Financial Economist from Jefferies and President-Elect of the National Multifamily Housing Council, will discuss the themes and economic trends expected to shape investor behavior, including the multifamily housing market, in the year ahead.

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