Multifamily Performance Will Move Closer to Long Run Averages This Year

Moody’s Analytics expects multifamily rent growth to slow in 2023 to less than half of the 7.8% year-over-year increase that 2022 saw, the firm said in a report.

“The increasing multifamily supply along with a softening labor market, and potentially a mid-year rebound in single-family activity, will help recalibrate the housing market and bring performance of multifamily closer to long run averages,” the firm said.

Part of this may be due to what seems a trend of inflation calming. Discussing the Producer Price Index numbers for December 2022, released January 18, in which headline PPI was down 50 basis points from November (seasonally adjusted), Moody’s wrote, “This report comes as another positive sign for the U.S. economy, and importantly the Federal Reserve, that inflationary pressures are easing. For perspective, Headline PPI was at its lowest annual rate since March 2021, when the index was at 4.1% – and is well below the March 2022 high of 11.7%.” [Emphasis theirs.]

Falling inflation, especially when it turns into a recession, has historically correlated strongly with growing labor market softness and even greater unemployment. People who don’t have income often will move in with family or into a situation with roommates to lower their expenses. Also, lower incomes among many would mean fewer people who could afford to pay more to secure an apartment.

Another impact would be data suggesting that the single-family house market might be hitting bottom, with building permits in December down 29.9% year over year and 1.6% from the previous month. Housing starts were down 21.8% from the same time in 2021. And yet, completions at least for now are continuing. The additional short-term supply might bring more buyers in, although the Fannie Mae analysis that financial benefits was what really drove people to buy homes earlier in the pandemic might raise some second thoughts. Mortgage rates are still higher than they had been in a long time. Also, as Moody’s noted, the National Association of Realtors said that in 2022, existing home sales were down by 17.8% from 2021 and are at the lowest level of a decade.

And then there’s all the multifamily being built, with “approximately 300,000 units are expected to come online this year across tracked U.S. markets,” according to Moody’s. “This is a significant uptick from 2022, and would be a record high for apartment completions in our database. The easing of inflation, much through lower energy and material costs, is jumpstarting delayed multifamily projects, reinforcing our buoyed expectations for this level of activity in 2023.”