A 'Panicked Fed' and Other Multifamily Headwinds

Coming off what he said was arguably the most impressive performance year in the multifamily housing industry, Richard Barkham, Global Chief Economist and Global Head of Research, CBRE, wove a tale of caution for attendees at yesterday’s 2022 NMHC Apartment Strategies Conference in Orlando.

Barkham outlined five headwinds entering 2022 related to the apartment industry in comparison to a year ago.

Inflation and Interest Rates. Inflation is surging with the latest YoY read at 7 percent “and the Fed looks a bit panicked. At the moment, we’re at peak inflation and I suspect it will stay there for the first half of the year and then begin to ease. It should settle back in the 2 to 3 percent range by year’s end, which is still higher than the pre-pandemic norm of about 1 to 2 percent.

“The Fed feels like it’s a bit behind in reacting to inflation; I’d say that three rate hikes this year should be enough,” he said. “This will unnerve the stock market but strong corporate earnings will provide support.” 

Barkham forecasts the 10-year U.S. Treasury rate to be at 2.2% by the end of the year, “but we’re actually at negative real interest rates right now and should be there the remainder of the year, which is good for the apartment industry and its investors. We could hit positive real rates in 2023.”

He said the overall housing shortage will continue to enable apartment rents to increase “so investors can still choose to park their cash in apartments,” he said.

Some are suggesting there is a housing bubble, but Barkham said, “things are well supported right now; there isn’t excess leverage that can lead to a bubble, so we’re not in bubble territory right now.”

He said consumers will continue to spend their cash and eventually the labor market will normalize.

Labor and Other Factors

Labor Market. “The labor markets are as hot as can be and we’re about 5 million workers short of where we were pre-COVID as Americans are choosing to cash in from their stock market gains.” 

There are about 2 million fewer working-age immigrants in our country than anticipated so that is partly the cause for the labor shortage, he said.

COVID-19. “We’re seeing another COVID surge but this one is expected to be short-lived,” Barkham said.

Geopolitical threats. “There are mounting issues in Taiwan and the Ukraine and there seems to be a coordinated effort in the world to test America,” he said. “But if you look at the past 40 years’ worth of geopolitical events, they never seem to have a lasting impact on the economy.”

China. The Chinese economy has run into trouble and is being forced to shift its economic model.