Multifamily demand is likely to remain healthy in 2024, though rent growth will be tested by decelerating economic growth and a rapid supply uptick in some markets, Yardi Matrix says in the 2024 U.S. Multifamily Outlook.
The report says the higher interest-rate environment will stress property values and threatens to increase loan defaults. However, interest rates have probably peaked.
“Our expectations are that economic growth will be weak in 2024, with a soft landing the baseline likelihood, and that property owners should prepare for rates to remain higher than normal through most of the coming year,” the report says.
Multifamily rent growth also continues to decelerate and Matrix forecasts a tepid 1.5% rent growth nationally in 2024 for several reasons. Perhaps the biggest reason is the growth in supply. Another reason is affordability.
Highlights of the 2024 multifamily outlook
- Multifamily faces a mixed outlook in 2024. Property performance remains healthy for most apartments, but challenges will come from a wave of deliveries, rapid growth in expenses, a potential economic slowdown, and mortgage rates.
- The U.S. economy has remained surprisingly resilient, helping to maintain strong demand for housing, led by robust employment growth and moderate gains in consumer spending. However, economic growth is likely to slow in 2024 due to the effects of a higher-for-longer interest rate scenario. For commercial real estate, that means a market reset with higher acquisition yields, higher financing costs, and lower leverage and values.
- “We expect rent growth will be positive in 2024 but diminished by slowing absorption, supply growth and declining affordability after extraordinary gains in 2021-22. Growth will be led by metros in the Midwest, Northeast and smaller Southern and Mountain areas where demand remains consistent and deliveries are subdued.”
- Supply growth is at decades-long highs, with more than 1.2 million units under construction. Deliveries should top 500,000 units in 2024, with concentrations in rapidly growing markets in the South and West. However, the rise in construction financing is putting a lid on new starts, so 2024 is expected to be a peak year for deliveries.
- Multifamily expenses—particularly insurance but also labor, materials and maintenance—are rising rapidly. With income growth slowing, operating efficiency and cost-cutting will be focuses of the industry.
- Transaction volume fell by 70% in 2023 as falling values and rate volatility created pricing uncertainty. Activity is likely to remain weak in 2024, but could rebound later in the year if rate hikes have ended. Lenders are being cautious and borrowers are reluctant to lock in loans at high rates. Maturity defaults will be a growing issue as loans come due and properties qualify for proceeds that are less than the existing mortgages.