While rent growth is positive, “the market faces challenges related to the potential economic downturn and rising interest rates that have eroded property values and is likely to lead to an increase in distress,” the report says.
What Lies Ahead for Rents?
Multifamily rents continued to increase through the first half of 2023, despite challenges that included slowing demand, growing issues with affordability, slower population growth and competition from a large amount of new supply.
“We anticipate that rents will continue to increase modestly over the course of the year as demand has firmed, albeit at a more moderate rate in line with historical growth levels,” the report says.
Multifamily demand also is boosted by the sharp drop in home sales, which keeps renters in apartments. Low in-place mortgage rates are discouraging homeowners from selling homes, keeping inventory low and single-family prices high.
Rents also will continue to be constrained by affordability, as a growing number of households are paying more than 30 percent of their income on rent.
This can be addressed with more supply, but at the same time states and municipalities are debating rent-control and limits to development that will backfire if allowed to be implemented.
New Apartment Supply
Matrix expects 430,000 multifamily units to be delivered in the United States in 2023, an increase of 2.8 percent of stock, according to the multifamily mid-year report.
This new product represents a 15 percent increase over the 366,000 units (2.4 percent of stock) that came online in 2022. The increase in supply will put pressure on operators, but the impact will not be spread evenly across markets.
Deliveries will be focused in 10 to 15 of the fastest-growing markets.
Markets expected to deliver the highest numbers of new apartments in 2023 include Austin (22,310 units), Dallas (21,769), Miami (18,571), Atlanta (15,611), New York City (15,510) and Phoenix (13,592).
Capital Markets an Achilles Heel?
Property fundamentals are strong, but the increase in capital costs has injected pricing uncertainty into the market and made it difficult to complete a transaction of any kind, the report says.
Property sales and mortgage-origination volume are both down sharply and distress is on the rise.
The biggest hindrance to deal flow is the rapid and steep decline in property values stemming from the increase in interest rates and slowing rent growth.
“While there will be some rough patches ahead, and operators must cope with rising costs such as labor, taxes and insurance, multifamily has strong long-term fundamental demand drivers and solid liquidity from investors and lenders.
“Those attributes should enable it to withstand market conditions better than other commercial property types,” Yardi Matrix writes in the report.
About Yardi Matrix
Yardi Matrix researches and reports on multifamily, office and self-storage properties across the United States, serving the needs of a variety of industry professionals. Yardi Matrix Multifamily provides accurate data on 18+ million units, covering more than 90 percent of the U.S. population. Contact the company at (480) 663-1149.