This Year Marked a Turning Point for Multifamily Fundamentals

There’s good news in 2023 for multifamily says a CBRE report. Overall demand should hold steady. But a moderating force of new units is coming online, so don’t expect the results of the previous two years.

“It appears 2022 will be a turning point for multifamily fundamentals,” CBRE wrote. “Leasing activity was unseasonably slow in the summer when demand is typically at its strongest. This coincided with a steady pace of new deliveries, causing the overall vacancy rate to rise by 150 bps in Q2 and Q3 2022, pressuring rents.”

And yet, the firm says that still-strong housing fundamentals should keep occupancy rates higher than 95% and rent growth at 4%. That is far from the vacancy rates below 3% and double-digit rent increases that the pandemic ultimately brought, and rents won’t keep pace with ongoing inflation.

That may not ultimately be a big problem for multifamily property owners who, with previous increases, should have found themselves ahead of the game going into current conditions.

CBRE estimates that 3.5 million new market-rate units will be needed by 2035 to meet demand. The firm tracks 69 markets and estimates 796,000 units that are under construction. Of those, 450,000 are on track to deliver in 2023. That’s an additional 2.3% of inventory.

If that pace keeps up for the next 12 years, that would more than meet the number of units needed. Only, there are situations that could slow down construction and delivery. New starts are slowing because construction financing is getting more expensive and difficult to arrange and the Federal Reserve in mid-December said, “The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”

While attention is often on interest rates, also critical is the reduction of its balance sheet holdings of bonds. During the easy money times going into the pandemic, the agency kept the multifamily market going by purchasing huge volumes of mortgage-backed securities from Fannie Mae and Freddie Mac. That’s no longer the plan. “In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May,” the Fed further noted. That’s a big drop in a major source of liquidity for housing.

Offsetting that is potential slowing of housing demand growth. CBRE noted that as “households grapple with economic uncertainty, household formation and new renter demand will struggle to keep pace with supply. Vacancy rates will continue rising, albeit at a slower pace, and drift toward the 20-year average of 5%.”